Compliance Corner: SEC, UBS

Editorial Staff, July 20, 2021


The latest compliance news: regulatory developments, punishments, guidance, permissions and new product and service offerings.

Securities and Exchange Commission, UBS
The Securities and Exchange Commission has settled a case with UBS Financial Services Inc for compliance failures relating to sales of a volatility-linked exchange-traded product. 

Without admitting or denying the SEC’s findings, UBS agreed to cease and desist from violations of Rule 206(4)-7 of the Investment Advisers Act of 1940, a censure, and disgorgement and prejudgment interest of $112,274 and a civil penalty of $8 million, which will be distributed to investors harmed by the conduct at issue.

The ETP in this case is designed to track short-term volatility expectations in the market as measured against derivatives of a volatility index.

The SEC said in a statement that 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 banned brokerage representatives from soliciting sales of the product and placed other restrictions on sales of the product to brokerage customers. However, UBS did not put similar restrictions on certain financial advisors’ use of the product in discretionary managed client accounts, the SEC said.

The SEC said UBS adopted a concentration limit on volatility-linked ETPs, but failed to implement a system for monitoring and enforcing that limit for five years.  UBS prohibited the financial advisors from making additional recommendations of this ETP prior to being contacted by the Commission staff.

Between January 2016 and January 2018, certain financial advisors had a “flawed understanding” of the appropriate use of the volatility-linked ETP and failed to take sufficient steps to understand risks associated with holding the product for extended periods. The advisors bought and held the product in client accounts for “lengthy periods.”

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