FINRA has fined UBS Financial Services $2.5 million and ordered to pay $8.25 million in restitution for conduct related to the sale of Lehman Brothers Holdings principal protection notes.
The fine and restitution is tied to alleged misleading of investors that took place in the sale of the principal protection notes, or PPNs, prior to Lehman Brothers’ Sept. 2008 bankruptcy filing. The PPNs promised a minimum return equal to an investor’s investment, according to FINRA, and were structured as fixed-income security structured products including bonds and options.
“This matter underscores a firm’s need to be clear and comprehensive in disclosing risks of the structured products it sells to retail investors,” FINRA Executive Vice President and Chief of Enforcement Brad Bennett said in a statement. “In cases, UBS’ financial advisors did not even understand the complex products they were selling, and as a result, they neglected to disclose necessary information to customers about the issuer’s credit risk so investors would understand the magnitude of the potential losses.”
UBS’ advertisements and its financial advisors did not adequately disclose all the information related to the notes from March to June 2008, FINRA said. UBS’ violations, according to FINRA, included not disclosing that the principal protection relied on issuer credit risk; not making UBS advisors aware of the effect of credit default swap spreads on the firm; not supervising the sale of the PPNs or provide training or written policies related to their sale; not taking into account the suitability of the notes for certain customers; and misleading investors with certain advertising materials.
UBS’ advertising materials related to the notes reviewed by FINRA said that a return was guaranteed and did not mention credit risk, the organization said. UBS also did not establish suitability requirements, which led to investors with conservative and moderate profiles also taking part in the risky investments.
"UBS is pleased to have resolved this FINRA matter, under which UBS is required to reimburse a limited number of investors who purchased certain Lehman principal protection notes during a discrete 3 1/2 month period of time,” said UBS Spokeswoman Karina Byrne.
This decision will be limited to investors who purchased the notes from March 17, 2008 to June 30, 2008, and who still hold those investments, Byrne said. Investors who defined their risk tolerance as conservative will receive 100% of the principal they invested, Byrne said, minus the market value as of April 8, 2011. Those investors can then retain the notes themselves, Byrne said. Investors who declared a moderate risk tolerance, with $1 million or less in net worth, will receive 50% of their principal and can also retain the notes.
Investors who declared a higher risk tolerance or who have previously settled with UBS are not eligible. Byrne declined to disclose how many investors this decision includes. UBS sold a total of $1 billion in Lehman Brothers structured products.
“The significant majority of UBS's Lehman structured product sales were conducted properly and any client losses were the direct result of the unprecedented and unexpected failure of Lehman Brothers in 2008, which affected all Lehman investors,” Byrne said.
FINRA has seen a spate of arbitration cases related to UBS’ sale of the PPNs. In December, a FINRA arbitration panel ordered UBS to pay $2.2 million to CNA Financial Corp. Chairman and CEO Thomas F. Motamed and Christine B. Motamed. At the time, that was the largest award to an investor to date related to the PPNs.
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