UBS Financial Services Inc. will pay a total of $11 million in fines and restitution after agreeing to settle a matter before The Financial Industry Regulatory Authority (FINRA). The firm will pay $2.5 million in fines and another $8.25 million in restitution for what FINRA alleged were "omissions and statements made that effectively misled some investors regarding the 'principal protection' feature of 100% Principal-Protection Notes (PPNs)" that were issued by Lehman Brothers before it files for bankruptcy in September 2008.
Among the allegations in this matter were that some of the firm's financial advisors did not fully understand the "protection" provided by the product, and due to this were not able to correctly communicate details of the investment to customers. The situation was not helped by the allegation that customers were misled about the risks and limitations of the product found in the advertising materials.
The major issue with regard to clarity for customers was the suggestion that retaining the investment to maturity would guarantee the return of principal. In fact, credit risk was an underlying potential problem with return of principal, but customers were not informed of this.
As the credit crisis worsened, FINRA alleged that UBS did not inform investors that what the firm described as principal-protected investments were in fact unsecured obligations. Specifically, FINRA claimed that the firm failed to inform investors that the principal protection feature was in fact subject to credit risk; did not adequately supervise the sale of these investments including informing financial advisors of the impact of the credit crisis on them; fell short in the suitability analysis for certain customers; and, misled customers in advertising materials.
The firm is also alleged to have fallen short in their risk profile requirements, which allowed this product to be sold to customers with "moderate" to "conservative" risk profiles. Adding to this issue was the conclusion that "particular investors were more likely to rely on UBS' representations about the '100% principal protection' feature of Lehman PPNs because of their risk averse investment objectives."
The New York law firm Gusrae Kaplan Nusbaum PLLC, advises broker-dealers in establishing policies and procedures to comply with securities laws and regulations and represents broker dealers in proceedings before all regulatory agencies. Please contact our Wall Street law firm for more information about our advisory services as well as our regulatory and enforcement representation.
