UBS to Pay $15 Million Settlement Involving Retail Sale of Complex Products

UBS sold approximately $548 million of these volatility notes to more than 8,700 retail customers.

The Securities and Exchange Commission (SEC) has announced that UBS Group AG (UBSG:VTX) will pay $15 million in penalties to settle allegations that it misled customers in statements provided to retail investors for structured notes linked to certain complex financial products.

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The bank sold from 2011 to 2014 about $548 million in RCNs to more than 8,700 retail customers, including some retirees, who were relatively inexperienced and unsophisticated, according to the statement. The SEC said on Wednesday that UBS didn’t admit or deny the findings of the investigation.

UBS, one of the largest issuers of structured notes in the world, is paying $8.23 million in disgorgement of the profits from the sales, another $798,000 in interest and a $6 million penalty.

The complex products that are the focus of the SEC’s efforts include reverse convertible notes (RCNs) which are complex securities that feature embedded derivatives whose performance is driven by the concept of implied volatility.

The US watchdog accused UBS of lacking an effective policy or procedure to make the individuals with primary responsibility for selling the structured notes aware of the critical aspects of the offering which led them to make unsuitable recommendations to certain retail customers in light of their investment profiles.

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In determining to accept the offer, the SEC considered the substantial cooperation offered by UBS staff and certain remedial measures that UBS implemented voluntarily.

Money-making machine

Investment in structured products such as UBS’s offering is a money-making machine for Wall Street. It has increased drastically in recent years with banks selling $40 billion to $50 billion of structured notes annually. But, from the investor’s perspective, the practical experience proved that such structured products are burdened with costs and risks that far outweigh the benefits.

This case follows a $10 million settlement that Merrill Lynch entered into with US regulators earlier in June 2016. The SEC and FINRA have collectively levied $15 million in fines against the firm for failing to disclose material facts in its sales of the so-called strategic return notes that were promoted “as a hedge against potential downturns in the equities markets”.

Andrew Ceresney, Director of the SEC Enforcement Division, commented: “We can now analyze literally hundreds of millions of trading records using sophisticated coding techniques that allow us to build platform wide cases rather than cases built investor by investor.  We found that UBS dropped the ball by allowing the sales of complex financial products to retail investors without adequately training its sales force.”

Michael J. Osnato, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, added: “When it comes to complex financial products, investors are especially dependent upon firms making sure their financial advisors comprehend the potential risks and rewards of the investments they are recommending.  The SEC takes a dim view of firms that fall short in their obligations.”

 

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