The Securities and Exchange Commission took action against UBS Financial Services for compliance failures relating to sales of a volatility linked exchange-traded product (ETP).
The ETP at issue is designed to track short-term volatility expectations in the market as measured against derivatives of a volatility index. The product issuer warned UBS that it was not appropriate to hold the product for extended periods. Further, the product’s offering documents made clear that it was more likely to decline in value when held over a longer period.
The SEC’s order finds that while UBS prohibited brokerage representatives from soliciting sales of the product, it did not place similar restrictions on certain financial advisers’ use of the product in discretionary managed client accounts. In addition, it found 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.
Further, the SEC said 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 it for extended periods. These financial advisers purchased and held the product in client accounts for lengthy periods, resulting in meaningful losses.
“Advisory firms must protect clients from inappropriate investments in complex financial products,” Daniel Michael, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, said. “We will continue to scrutinize firms’ policies and procedures related to these risky products, and we will take action when they are inadequate.”
Without admitting or denying the SEC’s findings, UBS agreed to cease and desist from these violations, a censure, and disgorgement and prejudgment interest of $112,274, and a civil penalty of $8 million to be distributed to investors harmed by the conduct at issue.