UBS to pay $19.5m to settle SEC case over structured notes
The Securities and Exchange Commission (SEC) has announced that UBS is to pay $19.5m to settle civil charges, claiming it made false statements to US retail investors in its offering documents for complex structured notes tied to a proprietary foreign currency index.  The bank has neither admitted, nor denied, the charges under the terms of the settlement, and the SEC says it cooperated fully with regulators throughout the investigation.  This marks the first case by the SEC which has recently stepped up its focus on mis-statements involving structured notes, and has warned investors about the potential risks.  

Case Is Agency’s First Against an Issuer of Retail Structured Notes

FOR IMMEDIATE RELEASE

2015-238

The Securities and Exchange Commission today announced that UBS AG has agreed to pay $19.5 million to settle charges that it made false or misleading statements and omissions in offering materials provided to U.S. investors in structured notes linked to a proprietary foreign exchange trading strategy.

The case is the agency’s first involving misstatements and omissions by an issuer of structured notes, a complex financial product that typically consists of a debt security with a derivative tied to the performance of other securities, commodities, currencies, or proprietary indices. The return on the structured note is linked to the performance of the derivative over the life of the note. Between $40 billion to $50 billion of structure notes are registered with the SEC per year, with many of those notes sold to relatively unsophisticated retail investors.

UBS, one of the largest issuers of structured notes in the world, agreed to settle the SEC’s charges that it misled U.S. investors in structured notes tied to the V10 Currency Index with Volatility Cap by falsely stating that the investment relied on a “transparent” and “systematic” currency trading strategy using “market prices” to calculate the financial instruments underlying the index, when undisclosed hedging trades by UBS reduced the index price by about five percent.

“This first-of-its-kind case involving misstatements and omissions by a structured notes issuer shows that the SEC continues its commitment to pursue wrongdoing across the securities industry in order to better protect investors,” said SEC Chair Mary Jo White. “It is critical that large global financial institutions have and implement policies and procedures designed to ensure that all facts relevant to investors are made known to individuals responsible for disclosures.”

“This case demonstrates the importance of being truthful in offering materials to be used in the offer and sale of structured notes to retail investors,” said Andrew Ceresney, Director of the SEC's Division of Enforcement. “We will remain focused on protecting investors who are not in a position to protect themselves by virtue of their limited access to information, the complexity of the product, or both.”

According to the SEC’s order instituting a settled administrative proceeding:

UBS perceived that investors looking to diversify their portfolios in the wake of the financial crisis were attracted to structured products so long as the underlying trading strategy was transparent. In registered offerings of the notes in the U.S., UBS depicted the V10 Currency Index as “transparent” and “systematic.”

Between December 2009 and November 2010 approximately 1,900 U.S. investors bought approximately $190 million of structured notes linked to the V10 index.

UBS lacked an effective policy, procedure, or process to make the individuals with primary responsibility for drafting, reviewing and revising the offering documents for the structured notes in the U.S. aware that UBS employees in Switzerland were engaging in hedging practices that had or could have a negative impact on the price inputs used to calculate the V10 index.

UBS did not disclose that it took unjustified markups on hedging trades, engaged in hedging trades with non-systemic spreads, and traded in advance of certain hedging transactions.

The unjustified markups on hedging trades resulted in market prices not being used consistently to calculate the V10 index. In addition, UBS did not disclose that certain of its traders added spreads to the prices of hedging trades largely at their discretion.

As a result of the undisclosed markups and spreads on these hedging transactions, the V10 index was depressed by approximately five percent, causing investor losses of approximately $5.5 million.

The SEC’s order found that UBS acted negligently by misleading investors through material misstatements or omissions in the offering documents. Without admitting or denying the SEC’s findings, UBS agreed to cease and desist from committing or causing any similar future violations, to pay disgorgement and prejudgment interest of $11.5 million, to distribute $5.5 million of the disgorgement funds to V10 investors to cover the total amount of investor losses, and to pay a civil monetary penalty of $8 million. In determining to accept the offer, the SEC considered UBS’s substantial cooperation afforded its staff and certain remedial measures UBS implemented voluntarily.

The SEC’s investigation was conducted by Complex Financial Instruments Unit staff James F. Murtha, Lawrence C. Renbaum, and Kapil Agrawal under the supervision of CFI’s Deputy Chief Reid A. Muoio and Chief Michael J. Osnato. The SEC appreciates the assistance of the Federal Bureau of Investigation and the U.S. Department of Justice’s Fraud Section in Washington, D.C.