SEC Fines UBS $8 Million for Compliance Failures in ETP Sales

The Securities and Exchange Commission (SEC) yesterday announced that it had filed a settled action against UBS Financial Services Inc. (UBS), a brokerage firm and investment advisor, for compliance failures relating to sales of a volatility linked exchange-traded product (ETP). 

According to the SEC, the issuer of ETP 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.

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The SEC found that UBS prohibited brokerage representatives from soliciting sales of ETP 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. And the Commission further found that UBS adopted a concentration limit on volatility-linked ETP, but failed to implement a system for monitoring and enforcing that limit for five years.

Additionally, the Commission 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. And 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.

Without admitting or denying the SEC’s findings, UBS agreed to cease and desist from violations of Rule 206(4)-7 of the Investment Advisers Act of 1940, a censure, and 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.