Last week the SEC announced that it settled its action against UBS Financial Services Inc. (“UBS”) for supervisory failures relating to selling a volatility linked exchange-traded product. Currently exchange traded products, also known as“ETPs” are the focus of the SEC Enforcement Division’s current ETP initiative which has been going after volatility linked ETPs since the end of 2020.
In November of last year, the SEC announced actions against American Portfolios Financial Services/American Portfolios Advisors Inc., Benjamin F. Edwards & Company Inc., Royal Alliance Associates Inc., Securities America Advisors Inc., and Summit Financial Group Inc. resulting in $3 million being returned to harmed investors for the improper sale of ETPs.
As described in the SEC’s recent order against UBS, UBS brokers sold a particular ETP meant to track short-term volatility expected in the market as measured against derivatives of the “volatility index.” According to the regulator’s order, the issuer of the product called iPath S&P 500 VIX Short-Term Futures ETN (“VXX”) warned UBS that it was inappropriate to hold the product for a long period. Additionally, the offering documents for VXX made clear that this investment, if held over a longer time period, was more likely to decline in value. The SEC found that although UBS prohibited its brokers from soliciting sales of VXX and placed other restrictions on its sale to customers, it failed to similarly place restrictions on financial advisers’ use of it in some discretionary accounts. In addition, UBS had a concentration limit on such volatility-linked ETPs, and did not implement a monitoring system to enforce those limits for a five year time period.
Finally, the SEC found that between January 2016 and January 2018, some financial advisers did not have an appropriate understanding of the proper use of VXX and thus failed to understand the risks associated with extended periods in which their customers were holding the product. Because of this failure, these financial advisers both purchased and held VXX in their clients’ accounts for longer periods than were appropriated, including holding it in hundreds of accounts for over a year, which resulted in those customers’ suffering meaningful losses.
Although it did not admit or deny the SEC’s findings, UBS agreed to a censure, and will pay profits and prejudgment interest of $112,274, as well as an $8 million civil penalty. That penalty will be used to reimburse UBS’s customers harmed by these actions.
Volatility-Linked ETPs Can Be Useful Where Used Short-Term
When properly recommended, these complex ETPs can be useful in a customer’s portfolio to manage short-term market volatility. However, in order for them to be sold in a suitable way to the customer, they must be thoroughly understood the advisors and brokers who are recommending them. The SEC’s in this recent action and the earlier ones, make abundantly clear that firms who recommend such products must have proper systems in place to ensure they are sold properly for their intended investment objectives, including that of short-term holding.
As explained by FINRA, investors in volatility-linked ETPs could risk major losses if they do not fully understand how they work. Some might believe, for instance, that the ETP product can be used long-term as a hedge on equity positions in the event of a market downturn. However, in truth, most volatility-linked ETPs are simply short-term trading products that degrade significantly the longer they are held and are not designed to be used as long-term as a buy-and-hold investment.
Contact us for a Free Consultation
If you or a loved one has lost money due to an unsuitable recommendation to buy or hold complex volatility linked investment, or have been the victim of any other type of investment scam, investment fraud or broker negligence, contact the offices of Investment Fraud lawyer Melanie Cherdack for a free consultation. Because she has been in the trenches as a former Wall Street attorney, Melanie Cherdack and her team of experienced attorneys have seen just about every type of investment fraud or investment scam. While almost every investment carries a degree of uncertainty and risk, you may have been unnecessarily exposed to such risk. Former Wall Street securities attorney Melanie S. Cherdack and her team of lawyers represent individual and institutional investors who are unwitting victims of investment fraud and broker negligence. She heads up a group of attorneys who represent investors across the United States. Contact us by filling out our online contact form, or calling 888-768-2499 or 305-349-2336.