UBS Financial Services paid more than $15 million to settle Securities and Exchange Commission charges that it improperly sold risky, complex products to investors, the agency announced on Wednesday.
In pursuing the case, the SEC said that it used for the first time against a broker-dealer a coding technique that allows it analyze data across an entire trading platform to identify potential unsuitable transactions to particular investors.
The case revolves around the sales of approximately $548 million in reverse convertible notes to 8,743
UBS retail customer between 2011 and 2014. The investments are debt obligations linked to underlying stocks that pay a higher-than-normal interest rate because they use embedded derivatives linked to the volatility of the base stock.
The SEC charged that the investors who bought the products did not understand the volatility and risk associated with them and neither did the
UBS registered representatives who sold them.
“This inadequate training and education led to the unsuitable recommendations of RCNs to certain of the customers who had identified to
UBS modest reported income and net worth, primarily moderate or conservative investment objectives, and some of whom were retired,” the
SEC order states.
UBS will pay $8.2 million in disgorgement, a $6 million penalty and $798,316 in interest.
“The settlement is related to Reverse Convertible Notes, with a single stock as the underlying asset,” UBS spokesman Gregg Rosenberg said in a statement. “The notes were sold to clients between 2011 and 2014. We are pleased to have resolved the matter.”
The SEC analyzed a trove of trading data to ferret out UBS sales targeted to an entire class of clients who should not have had the complex, risky structured notes in their portfolios. The SEC used big data, rather than weaving together individual examples of harm, in building the case.
“It allows us to be much more efficient in our investigations,” Andrew Ceresney, director of the SEC Division of Enforcement, said in a media conference call. “This case should put the industry on notice that we will use these techniques” in future enforcement actions.
Mr. Ceresney said it's the first time the SEC has used this particular kind of data analytics to identify a broker's improper sales to an entire class of investors and its deficiencies in educating and training reps in those sales.
The SEC's use of big data against UBS sounds similar to a program proposed by the
Financial Industry Regulatory Authority Inc., the industry-funded broker-dealer regulator.
Finra
withdrew the initiative , a massive data collection system known as CARDS, after its industry members protested that it would be too costly and potentially expose customer data to hackers.
Mr. Ceresney declined to comment on whether the SEC's case against UBS was an example of what might have occurred if CARDS had come to fruition.
“I don't think it would be appropriate to compare it to the CARDS database,” Mr. Ceresney said.
Now that the SEC can “look across a platform” to analyze sales to particular customers puts a premium on preparing registered representatives to sell complex products.
“Firms should look at the education and training of financial advisers, particularly in light of who they are marketing to,” Mr. Ceresney said.
