SEC orders UBS to pay $8 million over sales of complex exchange-traded products
Investments pegged to market volatility remained in client accounts for up to a year when they were meant to be short-term investments.
The Securities and Exchange Commission on Monday ordered UBS Financial Services Inc. to pay more than $8 million for unsuitable sales of investments pegged to market swings.
The SEC alleged that between January 2016 and January 2018, UBS financial advisers purchased and held for advisory clients in discretionary accounts an exchange-traded product linked to a market volatility index, the iPath S&P 500 VIX Short-Term Futures ETN (VXX), according to the SEC order.
The advisers did not understand how the instruments worked and held them in approximately 1,882 accounts for a long time — sometimes more than a year — when they only were supposed to be used on a short-term basis. The increased risk from extended holding periods resulted in meaningful losses on their VXX investments, the SEC order said.
Under the agreement, UBS will pay an $8 million penalty as well as $96,344 in disgorgement and $15,930 in interest. The firm did not admit to or deny the SEC’s charges.
The SEC alleged that UBS failed to adopt and implement policies and procedures that prevented the volatility-linked ETP from being used as a buy-and-hold investment for advisory clients in its Portfolio Management Program, although it did monitor the accounts for concentration limits. The firm did have controls in place to monitor holding-period risk for other products, the SEC said.
The SEC order said UBS prohibited sales of VXX to customers in brokerage accounts but allowed them in certain discretionary managed client accounts.
In October 2017, UBS prohibited the VXX product in Portfolio Management Program accounts and required the accounts holding it to exit the position by January 2018. The SEC said UBS took the action before being contacted by agency staff.
“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 in a statement. “We will continue to scrutinize firms’ policies and procedures related to these risky products, and we will take action when they are inadequate.”
UBS stressed that the case focused on the limited problem that the firm itself corrected.
“After fully cooperating with the SEC, UBS is pleased to have resolved this matter related to the firm’s policies and procedures for one product in one of its discretionary trading programs between 2016 and 2018,” UBS spokesperson Erica Chase said in a statement. “As the SEC acknowledged, UBS proactively reviewed and removed the product from its program before being contacted by the SEC.”
The enforcement action is the sixth the SEC has filed as part of an initiative targeting complex exchange-traded products.
Neither investors nor financial advisers fully grasped the intricacies of the volatility-linked products, even though their risks are spelled out in the issuer’s offering documents.
“People are not being advised properly and they’re losing a lot of money because of the way these products are structured,” said Tom Gorman, a partner at Dorsey & Whitney. “This is a very important customer-driven case. You’re going to see more of these.”
Complex product cases are based in large part on data analysis, and the SEC is sophisticated in using such techniques for enforcement, said Gorman, a former SEC senior counsel in enforcement.
Where firms usually falter with complex products is a lack of understanding and inadequate procedures to prevent unsuitable sales, Gorman said. It’s not necessarily malfeasance.
‘This is not a fraud problem,” Gorman said. “This is a compliance issue.”
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