UBS Financial Services Inc.

Date:

September 2, 2021

Type of alert:

SEC Order  

Last month the Securities and Exchange Commission (SEC) filed an action against UBS Financial Services Inc. and is ordering them to pay more than $8 million for unsuitable sales of a volatility linked exchange-traded product (ETP).

The SEC alleged that between January 2016 and January 2018, certain UBS financial advisors, who did not have an appropriate understanding of the correct use of the volatility-linked ETP, purchased and held iPath S&P 500 VIX Short-Term Futures ETN (VXX) in client accounts. The product was held in approximately 1,882 client accounts for lengthy periods of time despite the issuer of the product warning UBS that they were intended to be used on a short-term basis. Hundreds of accounts held the product for over a year which resulted in “meaningful losses” on their VXX investments, according to the SEC order.

UBS settled the case without admitting or denying the findings. Under the agreement, UBS will pay an $8 million penalty which will be distributed to investors who were harmed by UBS brokers’ recommendations. The SEC also ordered UBS to pay $96,344 in disgorgement and $15,930 in interest in addition to the $8 million penalty.

“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.”

The SEC claimed 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.

UBS prohibited the VXX product in Portfolio Management Program accounts in October of 2017 and required the accounts holding it to exit the position by January 2018. UBS took the action before being contacted by the SEC.

The SEC order said UBS prohibited sales of VXX to customers in brokerage accounts but allowed them in certain discretionary managed client accounts. The SEC’s order can be found here: https://www.sec.gov/litigation/admin/2021/ia-5781.pdf.

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