More On Legal & Compliancefrom The Advisor's Professional Library
- Where Are We Headed? The ultimate compliance goal is to help ensure that everyone associated with an advisory firm acts ethically at all times. Advisors and RIAs should do the right thing, even when regulators are not looking over their shoulders.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
UBS Financial Services, Inc., will pay a fine of $2.5 million to FINRA and $8.25 million to investors as restitution to settle FINRA charges “for omissions and statements made that effectively misled some investors regarding the ‘principal protection’ feature of 100% Principal-Protection Notes (PPNs) Lehman Brothers Holdings Inc. issued prior to its September 2008 bankruptcy filing,” according to a FINRA announcement on Monday.
FINRA’s announcement states that “From March to June 2008 as the credit crisis worsened, UBS advertised and some UBS financial advisors described the structured notes as principal-protected investments and failed to emphasize they were unsecured obligations of Lehman Brothers, which eventually filed for bankruptcy in September 2008.” At issue was the “issuer credit risk” of the notes, which became relevant because of Lehman’s bankruptcy.
In a FINRA-UBS letter of acceptance, waiver and consent, FINRA described UBS’ alleged “statements and omissions having the effect of misleading certain customers,” and outlined “inadequate disclosures and FAs’ failure to accurately describe Lehman PPNs to certain customers during the relevant period.” The letter adds that UBS “failed to disseminate adequately to its FAs certain market information relating to Lehman’s financial condition.”
The letter also outlines “supervision violations” in to “FA training,” and “sales practices,” and stated that “during the relevant period certain sales of Lehman PPNs were unsuitable.”
When asked if other announcements were forthcoming regarding the PPNs, FINRA spokeswoman Michelle Ong responded, “FINRA is continuing to review matters involving Principle Protection Notes.”
In a statement emailed to AdvisorOne, UBS spokeswoman Karina Byrne, stated: "UBS is pleased to have resolved this FINRA matter, under which UBS is required to reimburse a limited number of investors who purchased certain Lehman principal protection notes during a discrete 3 1/2 month period of time. The significant majority of UBS's Lehman structured product sales were conducted properly and any client losses were the direct result of the unprecedented and unexpected failure of Lehman Brothers in 2008, which affected all Lehman investors."