SEC Fines UBS for Inadequate Employee Training

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The U.S. Securities and Exchange Commission (SEC) just announced that UBS Financial Services has agreed to pay over $15 million to settle charges regarding a failure to adequately educate and train its sales force about critical aspects of certain complex financial products it sold to retail investors.

According to the SEC, UBS failed to develop and implement policies and procedures reasonably designed to educate and train UBS registered representatives in connection with the sale of reverse convertible notes (RCNs) so that they could form a reasonable basis to make suitable recommendations.

For some background: RCNs are complex securities that feature embedded derivatives whose performance is driven by the concept of implied volatility.

Without adequate education and training, certain registered representatives made unsuitable recommendations in the sale of RCNs to certain retail customers in light of their investment profiles.

UBS sold roughly $548 million in RCNs to over 8,700 relatively inexperienced retail customers.

The report found that UBS failed reasonably to supervise its registered representatives within SEC regulations. UBS consented to the order without admitting or denying the findings. The order censures UBS and requires payment of $8.23 in disgorgement plus $798,316 in interest and a $6 million penalty.

Andrew Ceresney, director of the SEC Enforcement Division, commented:

We can now analyze literally hundreds of millions of trading records using sophisticated coding techniques that allow us to build platform wide cases rather than cases built investor by investor.  We found that UBS dropped the ball by allowing the sales of complex financial products to retail investors without adequately training its sales force.

Michael J. Osnato, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, added:

When it comes to complex financial products, investors are especially dependent upon firms making sure their financial advisors comprehend the potential risks and rewards of the investments they are recommending.  The SEC takes a dim view of firms that fall short in their obligations.