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UBS Hit With $8M SEC Fine Over Misuse of Volatility-Linked ETP

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What You Need to Know

  • UBS Financial Services agreed to pay an $8 million civil money penalty.
  • The issuer of the product warned UBS that it was not appropriate to hold the product for extended periods.
  • Certain PMP advisors had a flawed understanding of the appropriate use of VXX, the SEC said.

UBS Financial Services agreed Monday to pay the Securities and Exchange Commission an $8 million civil money penalty for compliance failures relating to sales of a volatility-linked exchange-traded product, or ETP.

According to the SEC’s order, which also requires UBS to pay $112,274 in disgorgement and prejudgment interest, UBS failed to adopt and implement written policies and procedures reasonably designed to prevent unsuitable investments in volatility-linked ETPs between January 2016 and January 2018.

As a result, “financial advisors in UBS’s discretionary Portfolio Management Program purchased and held one such ETP called iPath S&P 500 VIX Short-Term Futures ETN (VXX) for their advisory clients for durations that were inconsistent with the purpose of the product, as described in its offering documents, and as described to UBS in a meeting with representatives of the issuer of VXX,” the order states.

The issuer of the product warned UBS that it was not appropriate to hold the product for extended periods, and the product’s offering documents made clear that the product was more likely to decline in value when held over a longer period.

“UBS prohibited brokerage representatives from soliciting sales of the product and placed other restrictions on sales of the product to brokerage customers, but did not place similar restrictions on certain financial advisers’ use of the product in discretionary managed client accounts,” the order states.

During the relevant period, approximately 1,882 PMP client accounts held VXX for extended periods, with hundreds of accounts holding VXX for over a year.

“These accounts lost a substantial percentage — in many instances over 75% — of the value of their VXX investments,” the order states.

Certain PMP advisors “had a flawed understanding of the appropriate use of VXX and the associated risks,” the SEC said.

For example, several PMP advisors “stated that they viewed VXX as a hedge against an anticipated period of equity market volatility or a market downturn. They did not identify an investment time horizon, or take sufficient steps to understand whether negative roll yield would limit or eliminate any potential investment gains, as demonstrated in the Commodity 7 Futures-Linked Securities training module,” the order states.

Other than the presidential election of 2016, “none of the FAs testified that they anticipated a market correction based on a specific, near-term event. As a result, these PMP FAs could not make a reasonable determination as to whether VXX was a suitable investment for their clients,” the SEC said.

UBS said Monday in a statement shared with ThinkAdvisor that “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. As the SEC acknowledged, UBS proactively reviewed and removed the product from its program before being contacted by the SEC.”