UBS Financial Services, Inc., a broker-dealer headquartered in New York, New York, has been censured and disgorged of $8,227,566.00 plus interest by the Securities and Exchange Commission (SEC) pursuant to an Order Instituting Administrative Proceedings Pursuant to Section 15(b)(4) of the Securities Exchange Act of 1934 and UBS Financial Services, Inc.’s Offer of Settlement, which contained findings that the firm failed to supervise registered representatives’ sales of reverse convertible notes. In the Matter of UBS Financial Services, Inc., File No. 3-17587 (Sept. 28, 2016).
According to the Order, between 2011 and 2014, two-thousand and five-hundred reverse convertible notes had been structured by the firm’s Structured Solutions Desk in reference to four-hundred and twenty-five stocks. The Order stated the single stock-linked reverse convertible notes in question were comprised of debt obligations that had been linked to a single stock’s performance. The products were reportedly designed to pay greater interest rates than the rates provided by traditional debt products offered through the same issuers due to derivatives having been embedded in the products which offered synthetic puts on stocks that the products were tied to. The SEC indicated that the products were marketed to provide downside protection for customers in circumstances where the stock closed at or above a particular price point. Risks of these products were reportedly calculated by the firm to range from a ten percent risk of a twenty percent loss up to a forty percent risk of an unspecified amount of loss.
The Order stated that UBS’ registered representatives had not been supervised reasonably by the company’s Capital Markets Structured Solutions division due to the lack of the Structured Solutions Desk establishment and maintenance of procedures and policies intended to provide registered representatives’ with the proper training and education on single stock-linked reverse convertible notes. Particularly, the firm’s training and education focused in large part on the reverse convertible notes’ payouts, and failed to detail information concerning the notes’ options features. The Order stated that the firm’s training and education also fell short of describing implied volatility as well as the risk of selection changes pertaining to the products’ underlying stocks.
The supervisory failures reportedly prevented the firm’s registered representatives from comprehending the features, benefits and risks of reverse convertible notes, which included the aspects of volatility and how volatility could affect stocks from being selected to underlie the reverse convertible notes. The Order stated that registered representatives’ lack of training and education led them to make reverse convertible notes recommendations to customers which, considering the customers’ financial circumstances and objectives for investing, were unsuitable for customers.
The Order revealed that from 2011 to 2014, an estimated $10,700,000,000.00 of notional reverse convertible notes had been effected by the firm in forty-four thousand accounts. Customers were evidently positioned these products by UBS’ registered representatives so customers could potentially achieve principal protection and greater yields. However, an estimated five percent of the firm’s sales were effected in the accounts of customers who lacked experience investing in the products and who communicated objectives of investing on a conservative to moderate basis.
The SEC found UBS’ conduct of recommending unsuitable reverse convertible notes transactions to be violative of Securities Act of 1933 Section 17(a)(3). Further, the firm’s supervisory failures, which consisted of failing to adequately supervise registered representatives’ training, education, and recommendations, was conduct the SEC found to be violative of Securities Exchange Act of 1934 Section 15(b)(4)(E).
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