UBS hit with $8m SEC fine over volatility-tied compliance failures

UBS Wealth Management USA has agreed to pay a $8m fine to the Securities and Exchange Commission (SEC) over its failure to properly supervise brokers who sold complex exchange-traded products without understanding the risks.

According to the SEC’s order, which also requires UBS to pay $112,274 in disgorgement and prejudgment interest, UBS failed to adopt and implement written policies and procedures reasonably designed to prevent unsuitable investments in volatility-linked ETPs between January 2016 and January 2018.

As a result, “financial advisors in UBS’s discretionary Portfolio Management Program purchased and held one such ETP called iPath S&P 500 VIX Short-Term Futures ETN (VXX) for their advisory clients for durations that were inconsistent with the purpose of the product, as described in its offering documents, and as described to UBS in a meeting with representatives of the issuer of VXX,” the order stated.

The SEC noted that the firm prohibited the financial advisors from making additional recommendations of this ETP prior to being contacted by the Commission staff and did require brokers to take a training module before buying and selling VXX.

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.

“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 said.

The Commission noted that certain financial advisors had a “flawed understanding” of the product believing that they could use it as a long-term hedge. The order did not identify any individuals by name.

Head of the SEC Enforcement Division’s Complex Financial Instruments Unit Daniel Michael 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 settled the case without admitting or denying the findings.

“After fully cooperating with the SEC, UBS is pleased to have resolved this matter related to the firm’s policies and procedures for one product in one of its discretionary trading programs between 2016 and 2018,” a UBS spokeswoman said in a statement.

UBS removed the product from the PMP lineup in October 2017 after the Financial Industry Regulatory Authority ordered Wells Fargo Advisors to pay $3.4m over improper ETP sales. (It had earlier blocked VXX sales in brokerage accounts.)

UBS had also established a concentration limit of 3% of the account value on volatility-linked ETPs but the SEC said it failed for five years to put in place a compliance system to monitor or enforce that policy.

“PMP FAs with more than five years of experience were allowed to use their discretion to invest client assets in VXX,” the SEC said in the settlement order. “UBS did not restrict these FAs’ use of VXX to certain strategies or by client risk profile, net worth, or income.”

The settlement is the SEC’s sixth resulting from its ETP enforcement initiative. In November, it reached a $3m+ settlement with American Portfolios Financial Services, Benjamin F. Edwards & Company Inc., Royal Alliance Associates Inc., Securities America Advisors Inc., and Summit Financial Group Inc. over similar allegations.

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