The regulator alleges that supervisory failures led to unsuitable recommendations about these complex instruments.
UBS Financial Services will pay more than $15 million to settle SEC charges that it failed to “adequately educate and train its sales force about critical aspects of certain complex financial products it sold to retail investors,” according to SEC officials.
The SEC is alleging via its order that the firm did not develop and implement policies and procedures that would have adequately educated and trained UBS registered representatives to be able to sell reverse convertible notes (RCNs) and to make “suitable recommendations” about the complicated RCNs “that feature embedded derivatives whose performance is driven by the concept of implied volatility,” SEC officials say.
Some of the allegedly poorly prepared UBS registered representatives “made unsuitable recommendations in the sale of RCNs to certain retail customers in light of their investment profiles,” according to the SEC. “UBS sold approximately $548 million in RCNs to more than 8,700 relatively inexperienced retail customers.”
SEC officials are justifying their actions via the Securities Exchange Act Section 15(b)(4)(E), and are charging that the firm’s registered reps violated Section 17(a)(3) “in the offer and sale of RCNs.”
UBS officials have consented to the order without admitting or denying the findings. “The order censures UBS and requires payment of $8,227,566 in disgorgement plus $798,316 in interest and a $6 million penalty,” according to the SEC.
In response to FTF News, UBS officials say the matter is behind them.
“The settlement is related to Reverse Convertible Notes, with a single stock as the underlying asset,” says Peter Stack, managing director, head of media relations, Americas, in a statement. “The notes were sold to clients between 2011 and 2014. We are pleased to have resolved the matter.”
SEC officials add that they were able to detect the questionable UBS activity via a data analysis.
“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,” says Andrew Ceresney, director of the SEC Enforcement Division, in a prepared statement. “We found that UBS dropped the ball by allowing the sales of complex financial products to retail investors without adequately training its sales force.”
In another statement, Michael J. Osnato, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, says that the regulator takes “a dim view” of the firms that sidestep their obligation to properly train staff. “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,” Osnato says.
USB Financial Services Inc. offers wealth management, investment banking, and asset management services. In Switzerland, the firm offers retail and commercial banking, according to UBS.
The UBS Investment Bank division serves corporate, institutional, and wealth management clients with advice, financial solutions, execution and access to global capital markets, bank officials say. The bank also offers research, equities, foreign exchange, precious metals and tailored fixed income services in rates and credit through its two business units, Corporate Client Solutions and Investor Client Services. The Investment Bank is active sales, trading and market-making across a range of securities.
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