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SEC Orders UBS to Pay $8 Million Related to Complex ETP Sales

Posted on Monday, July 26th, 2021 at 7:56 pm    

UBS Financial Services Inc.

In July 2020, the Securities and Exchange Commission (SEC) ordered UBS Financial Services to pay $8 million, as well as $96,344 in disgorgement and $15,930 in interest, related to sales of complex exchange-traded products (ETPs), which were unsuitable for many investors. The SEC alleged that between January 2016 and January 2018, UBS Financial Services brokers purchased iPath S&P 500 VIX Short-Term Futures ETN (VXX), on their customers’ behalf. 

Unfortunately for many clients, these investments were intended to be held for short periods of time, however, some investment advisors held these investments in clients’ accounts for up to a year, resulting in significant investment losses.

The SEC alleged that UBS failed to adopt and implement policies and procedures that prevented the volatility-linked ETP from being used as a buy-and-hold investment for advisory clients in its Portfolio Management Program. Regrettably, UBS Financial Services did have controls in place to monitor holding-period risk for other products, according to the SEC.

The SEC reported that in October 2017, UBS prohibited the VXX product in Portfolio Management Program accounts and required the accounts holding it to exit the position by January 2018.

Inverse volatility-linked ETFs return a profit when the market experiences periods of low volatility. This is an extremely complex and risky security that is not suitable for the average investor, hedging a bet that the market will remain relatively stable. Some inverse ETFs are designed to provide investors with positive returns when the VIX falls, and inversely negative when the VIX rises. The VIX Index is referred to as a fear gauge for the market. 

The XIV was designed to produce opposite returns of the VIX, and when the volatility index shot through the roof back in February 2018 — a record 118 percent — the XIV went through the floor, down a devastating 90 percent. The ensuing negative feedback loop of selling is believed to have seriously exacerbated market turmoil. XIV is designed to produce opposite returns of the VIX, and when the volatility index increased by 188% on February 5 and the volatility index jumped to 38.3 (the highest level in several years), the XIV dropped. On February 6, 2018, stock indexes fell 10%, however, VelocityShares Daily Inverse VIX ETN dropped more than 90% down, from $99 to $7.35. On February 9, 2018, XIV closed at $5.38. 

In February 2018, the stock market faced volatility and the VIX rose rapidly, causing some ETFs to lose value, including VXX.

Pursuant to FINRA Rules, member firms are responsible for supervising a broker’s activities during the time the broker is registered with the firm. Therefore, UBS Financial Services may be liable for investment or other losses suffered by its customers.

Erez Law represents investors in the United States for claims against brokers and brokerage firms for wrongdoing. If you have experienced investment losses, please call us at 888-840-1571 or complete our contact form for a free consultation. Erez Law is a nationally recognized law firm representing individuals, trusts, corporations and institutions in claims against brokerage firms, banks and insurance companies on a contingency fee basis.