UBS’s Capital Markets Structured Solutions unit agreed to pay more than $15 million to the Securities and Exchange Commission for failing to adequately train its reps about the risks of structured notes sold to retail investors—including to retired seniors.
According to the SEC’s Sept. 28 order, UBS’s Structured Solutions Desk failed to develop and implement policies and procedures reasonably designed to educate and train UBS registered reps in connection with the desk’s single stock-linked reverse convertible notes business so that they could adequately understand the risks and rewards of the product.
Due to the lack of adequate education and training, certain registered reps made “unsuitable recommendations” in relation to the offer and sale of these RCNs to certain customers, the order states.
UBS sold approximately $10.7 billion of notional RCNs to approximately 44,000 customer accounts from 2011 through 2014, with the RCNs offered for purchase by retail customers as a way to enhance yield while providing some downside protection.
During the three-year period, UBS sold approximately $548 million of notional RCNs (about 5.1% of total sales) to 8,743 UBS retail customer accounts, “many of whom had little or no relevant investing experience and had identified to UBS modest reported income and net worth, primarily moderate or conservative investment objectives, and some of whom were retired,” the order states.
UBS’s internal education and training primarily focused on describing the payouts for the various products, the order states, but the firm did not provide adequate training on certain important aspects of RCNs.
“UBS’s internal educational materials did not describe sufficiently the role of implied volatility and the potential for breach in the selection of the equity securities underlying the RCNs,” the order states.
Cipperman Compliance Service, in commenting on the UBS fine, noted that, in this case, “the SEC holds the firm accountable for failure to properly train the reps, rather than pointing the finger at the compliance department or the reps themselves,” which “continues the trend of holding organizations and senior executives accountable for compliance failures.”
What’s more, “firms have a high regulatory burden when selling complex financial products to retail investors,” Cipperman said.
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