The Securities and Exchange Commission (SEC) filed fraud charges against UBS Financial Services on Wednesday, citing "inadequate" training and supervisory oversight of the company's financial advisers with respect to a sophisticated options trading strategy. UBS Financial Services agreed to pay about $25 million to resolve these charges.
According to the SEC's order, UBS sold and marketed its "Yield Enhancement Strategy" (YES) to about 600 investors between February 2016 and February 2017. This strategy "had the potential to generate modest returns during periods of low market volatility" but could, and ultimately did, suffer significant losses during high market volatility.
The plan was to sell short-term put and call options on the S&P 500 and hedge those positions by buying below-market puts and above-market calls with the same duration, as instructed, in order to generate income from an existing portfolio of securities. The SEC stated in a press release that even though UBS had documented the potential for significant risk in YES investments, it "failed to share this data with advisers or clients."
UBS consented to a cease-and-desist order, a censure, a civil penalty of $17.4 million, disgorgement of $5.8 million, and prejudgment interest of $1.4 million without acknowledging or denying the alleged misconduct.
According to the SEC, UBS acknowledged the significance of creating and implementing training and supervision to ensure fiduciary obligations but did not act on it until February 2017.
As per the SEC, internal communications that emphasized training and supervision issues included:
(1) A November 2015 email that listed "[t]raining for referring (financial advisers) on the strategy to be built, delivered, and tracked so they can effectively conduct their suitability obligations" as one of the YES post-approval conditions
(2) A July 2016 internal document that described a requirement financial advisers attest they had read and completed training
(3) 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."
A UBS internal document stated, "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."
"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," the YES supervisor later acknowledged.
An email from a company spokesman read, "UBS is pleased to have amicably resolved this matter related to training provided between February 2016 and February 2017 for an options overlay strategy. 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."
By fLEXI tEAM