SEC Orders UBS to Pay $8 Million Over Brokers’ Sales of Volatility-Linked ETFs
UBS Wealth Management USA has agreed to a censure and to pay $8 million over its failure to properly supervise brokers who sold complex exchange-traded products without understanding the risks, according to a settlement announced on Monday.
Between January 2016 and January 2018, financial advisors sold the iPath S&P 500 VIX Short-Term Futures ETN (VXX) in UBS’s discretionary Portfolio Management Program and recommended that customers hold the products even though they are intended only for short-term trading, the SEC said.
Despite warnings from the product manufacturer and in offering materials, 1,882 PMP client accounts held VXX for extended periods, including “hundreds” that held for over a year, resulting in “meaningful losses,” the SEC said.
The Commission noted that certain financial advisors had a “flawed understanding” of the product believing that they could use it as a long-term hedge. The order did not identify any individuals by name.
“Advisory firms must protect clients from inappropriate investments in complex financial products,” Daniel Michael, head of the SEC Enforcement Division’s Complex Financial Instruments Unit, said in a prepared 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 settled the case without admitting or denying the findings.
The SEC noted that the firm prohibited the financial advisors from making additional recommendations of this ETP prior to being contacted by the Commission staff and did require brokers to take a training module before buying and selling VXX.
“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,” a UBS spokeswoman said in a statement.
A person familiar with the matter said that UBS removed the product from the PMP lineup in October 2017 after the Financial Industry Regulatory Authority ordered Wells Fargo Advisors to pay $3.4 million over improper ETP sales. (It had earlier blocked VXX sales in brokerage accounts.)
UBS had also established a concentration limit of 3% of the account value on volatility-linked ETPs but the SEC said it failed for five years to put in place a compliance system to monitor or enforce that policy.
“PMP FAs with more than five years of experience were allowed to use their discretion to invest client assets in VXX,” the SEC said in the settlement order. “UBS did not restrict these FAs’ use of VXX to certain strategies or by client risk profile, net worth, or income.”
The settlement is the SEC’s sixth resulting from its ETP enforcement initiative. In November, it reached a $3 million-plus settlement with American Portfolios Financial Services, Benjamin F. Edwards & Company Inc., Royal Alliance Associates Inc., Securities America Advisors Inc., and Summit Financial Group Inc. over similar allegations.