For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, : UBS Financial Services Inc. ("UBS") submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of UBS Financial Services Inc., Respondent (AWC 20090182292, May 1, 2012).
UBS (and its predecessor, PaineWebber & Co.) has been a FINRA-registered broker-dealer since October 1936. UBS is a full service brokerage firm headquartered in Weehawken, NJ, and presently has some 385 active branch offices with about 7,000 registered financial advisors.
July 2009 FINRA ETF Notice
As described in "Non-Traditional ETFs: FINRA Reminds Firms of Sales Practice Obligations Relating to Leveraged and Inverse Exchange-Traded Funds"(FINRA Regulatory Notice 09-31, June 2009), ETFs are typically registered unit investment trusts (UITs) or open-end investment companies whose shares represent an interest in a portfolio of securities that track an underlying benchmark or index.
Leveraged ETFs seek to deliver multiples of the performance of the index or benchmark they track. Some Non-Traditional ETFs are "inverse" or "short" funds (or combinations of both), meaning that they seek to deliver the opposite of the performance of the index or benchmark they track. Such objectives are achieved through the use swaps, futures contracts and other derivative instruments.
The AWC asserts that Non-Traditional ETFs generally "reset" daily, and such a factor can have significant ramifications that distort the performance of the subject ETF and its underlying index or benchmark. For example, the AWC notes that the Dow Jones U.S. Oil & Gas Index, between December 1, 2008 and April 30, 2009, gained two percent, while an ETF seeking to deliver twice the index's daily return fell six percent, and the related ETF seeking to deliver twice the inverse of the index's daily return fell 26 percent.
Despite the risks associated with holding Non-Traditional ETFs for longer periods, the AWC alleges that certain UBS customers held Non-Traditional ETFs for extended time periods during the relevant period of January 2008 through June 2009. In fact, certain UBS customers with a primary investment objective of income held Non-Traditional ETFs for periods of several months. The AWC offers these examples:
• A 64-year old customer with a primary conservative risk tolerance profile and net worth of $290,000 held a Non-Traditional ETF for 139 days in his IRA account and sustained losses of over $5,700 (43% of his initial investment); and
• A 54-year old customer with a primary conservative risk tolerance profile and net worth of $400,000 held a Non-Traditional ETF for 21 days and sustained losses of over $5,000.
During the relevant period from January 2008 through June 2009, FINRA alleged that UBS failed to establish and maintain a supervisory system, including written procedures, reasonably designed to achieve compliance with applicable NASD and/or FINRA rules in connection with the sale of leveraged, inverse, and inverse-leveraged Exchange-Traded Funds ("Non-Traditional ETFs"). The AWC alleges that UBS supervised Non-Traditional ETFs the same way it supervised traditional ETFs. Thus, UBS failed to establish a reasonable supervisory system and written procedures to monitor the sale of Non-Traditional ETFs.
The AWC further alleges that UBS also failed to establish adequate formal training regarding Non-Traditional ETFs during the Relevant Period.
In addition, certain UBS registered representatives allegedly did not have an adequate understanding of Non-Traditional ETFs before recommending these products to retail brokerage customers. Certain UBS registered representatives also made unsuitable recommendations of Non-Traditional ETFs to certain customers with a primary investment objective of income.
As such, the AWC alleged that UBS violated NASD Rules 3010, 2310, and 2110 and FINRA Rule 2010, and, according to the terms of the AWC, FINRA imposed sanctions of a Censure, a $1.5 million fine, and $431,488 in restitution.