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Regulation and Compliance > Federal Regulation > SEC

UBS to Pay $19.5M Over Structured Notes

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The SEC said Tuesday that UBS AG (UBS) will pay $19.5 million to settle charges that it made false or misleading statements and omissions in investor materials for structured notes linked to a proprietary foreign exchange trading strategy.

The fines are associated with about $190 million of structured notes sold to about 1,900 U.S. investors from December 2009 to November 2010 and associated with losses of roughly $5.5 million.

UBS agreed to settle the Securities and Exchange Commission’s charges that it “misled U.S. investors in structured notes tied to the V10 Currency Index with Volatility Cap by falsely stating that the investment relied on a ‘transparent’ and ‘systematic’ currency trading strategy using ‘market prices’ to calculate the financial instruments underlying the index, when undisclosed hedging trades by UBS reduced the index price by about 5%,” the organization explained.

“This first-of-its-kind case involving misstatements and omissions by a structured-notes issuer shows that the SEC continues its commitment to pursue wrongdoing across the securities industry in order to better protect investors,” said SEC Chairwoman Mary Jo White, in a statement. “It is critical that large global financial institutions have and implement policies and procedures designed to ensure that all facts relevant to investors are made known to individuals responsible for disclosures.”  

For its part, the financial services company says it is “pleased to have resolved this legacy matter with the SEC,” according to spokeswoman Karina Byrne. “UBS is firmly focused on the future with an unwavering commitment to upholding a culture of doing the right thing and reducing operational risks.”

Returns on structured notes are linked to the performance of a derivative tied to a debt security. Between $40 billion and $50 billion of structured notes are registered with the SEC annually, and many notes are sold to relatively unsophisticated retail investors, the regulatory body says.

“This case demonstrates the importance of being truthful in offering materials to be used in the offer and sale of structured notes to retail investors,” said Andrew Ceresney, director of the SEC’s Division of Enforcement, in a press release. “We will remain focused on protecting investors who are not in a position to protect themselves by virtue of their limited access to information, the complexity of the product, or both.”

According to the SEC’s order UBS did not have “an effective policy, procedure or process to make the individuals with primary responsibility for drafting, reviewing and revising the offering documents for the structured notes in the U.S. aware that UBS employees in Switzerland were engaging in hedging practices that had or could have a negative impact on the price inputs used to calculate the V10 index.” Furthermore, the SEC says that UBS did not disclose “that it took unjustified markups on hedging trades, engaged in hedging trades with non-systemic spreads, and traded in advance of certain hedging transactions.”

The markups resulted in market prices not being used consistently to calculate the V10 index, the regulatory body adds. Furthermore, it asserts that UBS did not disclose that some traders added spreads to the prices of hedging trades “largely at their discretion.”

Due to the undisclosed markups and spreads on these hedging transactions, the V10 index was depressed by roughly 5%, according to the SEC, which caused investor losses of some $5.5 million.

UBS did not admit nor denying the SEC’s findings and agreed to cease and desist from committing or causing similar violations in the future, to pay disgorgement and prejudgment interest of $11.5 million, to share $5.5 million of the disgorgement funds to V10 investors to cover losses, and to pay a civil penalty of $8 million.

— Check out Santander Securities Slammed by FINRA Over Puerto Rican Muni Bond Sales on ThinkAdvisor.


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