UBS Financial Services Settles SEC Charges Over Exchange-Traded Products Compliance Lapses for $8M

Customers Were Allegedly Unsuitably Sold Complex Exchange-Traded Products

UBS Financial Services (UBS) has agreed to a censure and will pay an $8M fine in the Securities and Exchange Commission’s (SEC) civil case accusing the brokerage firm of failing to properly supervise its brokers.

UBS financial advisors sold complex exchange-traded products (ETPs) without fully comprehending all of the risks involved. The SEC has also ordered the firm to pay disgorgement plus interest of almost $113K. 

The Commission contends that between January 2016 and January 2018, USB brokers that sold iPath S&P 500 VIX Short-Term Futures ETN (VXX) in the firm’s discretionary Portfolio Management Program recommended that customers hold these ETPs even though they are meant for short-term trading. 

As a result, 1,882 UBS clients in the program held this investment for long periods, sustaining “meaningful losses” as a result. 

The SEC believes that UBS financial advisors’ understanding of iPath S&P 500 VIX Short-Term Futures ETN (VXX) was “flawed,” causing them to mistakenly think that they could use the investment as a long-term hedge.

iPath S&P 500 VIX Short-Term Futures ETN was finally removed from the Portfolio Management Program in late 2017 after the Financial Industry Regulatory Authority (FINRA) told Wells Fargo Management to pay $3.4M because its customers were allegedly unsuitably recommended volatility-linked exchange-traded products. 

Although UBS had set a 3% concentration limit of the account value of ETPs that were volatility-linked, the SEC contends that the firm did not set up a compliance system to oversee or enforce that limit for five years. 

The regulator also said that UBS financial advisors who had over five years of experience were allowed to use their own discretion over whether to invest clients in iPath S&P 500 VIX Short-Term Futures ETN (VXX) as opposed to making such recommendations based on suitability standards or certain strategies.

What is the iPath S&P 500 VIX Short-Term Futures ETN?

Listed on the NYSE Arca, iPath S&P 500 VIX Short-Term Futures ETN is a complex, volatility-linked exchange-traded note. It offers customers exposure to futures contracts of certain maturities on the VIX, which looks to track the likely volatility of the S & P 500. 

Futures contracts found on the VIX let investors get involved in forwarding volatility according to their view of the VIX’s near-future direction. Like other exchange-traded notes, iPath S&P 500 VIX Short-Term Futures ETN is not suitable for just any investor, including conservative investors such as most retirees and retail investors, and they can be very volatile and risky.

It was just late last year that the SEC settled with five dually registered investment advisory firms over charges related to volatility-linked ETPs that were unsuitably invested and held too long for retail customers when these products should have instead been treated as short-term investments. 

Benjamin F. Edwards & Co., American Portfolio Financial Services/American Portfolio Advisors, Summit Financial Group, Securities America Advisors, and Royal Alliance Associates were ordered to give back more than $3M to customers that were harmed and the RIAs agreed to respective civil penalties ranging from $500K to $600K

Experienced Exchange-Traded Note Fraud Attorneys

Our FINRA arbitration lawyers at Shepherd Smith Edwards and Kantas (SSEK Law Firm at represent investors who have suffered losses because they were unsuitably recommended in iPath S&P 500 VIX Short-Term Futures ETN or other exchange-traded products. Call SSEK Law Firm today at (800) 259-9010 or visit our Contact Us page.

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