SEC Hits UBS With $8M Fine for ETP Compliance Failures

The Securities and Exchange Commission (SEC) this week filed a settled action against UBS Financial Services related to compliance failures for sales of a volatility-linked exchange-traded product (ETP). It marks the sixth case for the agency’s ETP Initiative.

The ETP was designed to track short-term volatility expectations in the market as measured against a volatility index’s derivatives. The issuer allegedly warned UBS the product should only be held for short terms, and the offering documents support that contention. According to the SEC UBS prohibited brokerage representatives from soliciting sales of the ETP and also restricted its sales to brokerage customers but failed to do the same on certain financial advisers’ use of the product in discretionary managed client accounts. While UBS adopted a concentration limit on volatility-linked ETP they didn’t introduce a monitoring and enforcement system over them for five years. UBS also stopped financial advisers from recommending this ETP before being contacted by SEC staff, the document states.

Between January 2016 and January 2018, some advisers had an incorrect understanding of how to appropriately use the volatility-linked ETP and didn’t take sufficient research to understand the risks of holding them for prolonged periods. Hundreds of accounts ended up holding the product for more than one year and sustained significant losses.

“Advisory firms must protect clients from inappropriate investments in complex financial products,” said Daniel Michael, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit. “We will continue to scrutinize firms’ policies and procedures related to these risky products, and we will take action when they are inadequate.”

Without comment on the 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. The $8 million will be distributed to harmed investors.

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