UBS Financial Services agreed to pay approximately $25 million to settle fraud charges brought by the Securities and Exchange Commission (SEC) on Wednesday that cited “inadequate” training and supervisory oversight of the firm’s financial advisers regarding a complex options trading strategy.
Between February 2016 and February 2017, UBS sold and marketed to approximately 600 investors its “Yield Enhancement Strategy” (YES), which “had the potential to generate modest returns during periods of low market volatility” but could, and eventually did, suffer significant losses during high market volatility, according to the SEC’s order.
The strategy was designed to generate income from an existing portfolio of securities, generally selling short-term put and call options on the S&P 500 and hedging those positions by purchasing below-market puts and above-market calls with the same duration, per the order. Although UBS documented the possibility of significant risk in YES investments, it “failed to share this data with advisers or clients,” the SEC stated in a press release.
Without admitting or denying the alleged misconduct, UBS agreed to a cease-and-desist order; a censure; and to pay a civil penalty of $17.4 million, disgorgement of $5.8 million, and prejudgment interest of $1.4 million.
Compliance considerations: UBS recognized the importance of developing and implementing training and supervision to ensure fiduciary obligations but did not follow through until February 2017, the SEC stated.
Internal communications that highlighted training and supervisory concerns, as described by the SEC, included:
- A November 2015 email that included “‘[t]raining for referring (financial advisers) on the strategy to be built, delivered, and tracked so they can effectively conduct their suitability obligations’” among YES post-approval conditions;
- An internal document dated July 2016 that described a requirement financial advisers attest they had read and completed training before opening a YES account for a client; and
- An internal document dated December 2016 where UBS represented, “‘Each financial adviser who is considering recommending the YES strategy to their clients must first complete the (financial advisers) training for the YES strategy.’”
After hiring a dedicated supervisor in February 2017, a UBS internal document noted, “‘Compliance has highlighted that the Complex and Division Management Teams do not have a full understanding of the YES strategy, and this could result in increased regulatory risk and poor supervision. The hiring of [the Yes Supervisor] should solve for this concern, given his compliance/management experience and good understanding of the strategy,’” the SEC said.
The YES supervisor later acknowledged, “‘Training of (financial advisers) and supervisors needs to be more direct and better documented … with an appropriate test to confirm understanding of the strategy and its associated risks and rewards.’”
UBS response: “UBS is pleased to have amicably resolved this matter related to training provided between February 2016 and February 2017 for an options overlay strategy,” a company spokesman said in an emailed statement. “UBS appreciates the SEC’s acknowledgment that in early 2017, UBS voluntarily remediated the issue by enhancing its risk control framework and strengthening its training program for the strategy.”