Complex trading products continue to be a focal point for regulators. Frequently, the products being marketed to investors are designed for a specific purpose such as trading under certain conditions or to moderated the impact of specific market trends. Before investing in these products the average investor must take care to fully understand the product, preferably with the assistance of a skilled and knowledgeable market profession. All to often, however, the professionals marketing the products have incomplete information or only a limited understanding of the product being sold. See, e.g. American Financial Services, Adm. Proc. No. 3-20151 (Nov. 11, 2020)(investors suffered losses from product re volatility for very short term use held by investors for over a year). This has resulted in enforcement cases by the Commission and proposed rules by FINRA. The Commission’s latest case in the area is a good illustration of this trend. In the Matter of UBS Financial Services, Inc., Adm. Proc. File No. 3-20912 (June 29, 2022).

The proceeding names as respondent the dual registered investment adviser and broker-dealer. The action centers on a product known as Yield Enhancement Strategy or YES. The product, developed by the firm, consisted of an existing portfolio of debt or equity securities that served as collateral for the purchase and sale of a combination of options on the S&P 500. During periods of low volatility YES made modest returns; during volatile periods it could and did generate losses.

YES was marketed for about a year, beginning in February 2016. About $2 billion in client funds was invested. At first there were small gains; later in late 2018 as volatility increased there was a 13% loss. The Order alleges that the firm gave its financial advisers inadequate training and insufficient supervision. The firm took remedial steps here. The Order alleges violations of Advisers Act Sections 206(2) and 206(4).

The firm resolved the matter, consenting to the entry of a cease-and-desist order based on the Sections cited in the Order and to a censure. It also agreed to pay disgorgement of $5.8 million plus prejudgment interest of $1.4 million. The firm will also pay a penalty of $17.4 million. A Fair Fund will be established.

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From the beginning the purpose of the federal securities laws has been to bring a new ethics to the marketplace. For years the statutes have been interpreted in a flexible manner to help achieve the new ethics goal. Indeed, the Commission has over the years employed a number of approaches to aid the effectuation of the statutory goal. One is the gatekeeper theory. Born in the earliest days of the Enforcement Division, the theory posits that professionals – lawyers, accountants and market professionals – have ethical obligations which if properly implemented would aid in fulfilling the new ethics goal of the statute while deterring wrongful conduct. This approach is what underlies the Commission’s latest enforcement action holding professionals accountable for ethical failures. In the Matter of Ernst & Young, LLP, Adm. Proc. File No. 3-20911 (June 28, 2022).

Ernst & Young is one of the largest accounting, auditing and consulting firms in the world. As auditors of public companies, accountants and consultants, part of their obligation is to safeguard and help further the ethical underpinnings of their profession in the marketplace. It is for this reason that to become a licensed CPA, applicants must in most states pass ethics examinations. It is with this goal in mind that many state accountancy boards require CPAs to complete continuing professional education courses – to reinforce their knowledge of “ethical obligations and current accounting standards.”

Despite these repeated tutorials, on multiple occasions between 2017 and 2021, and for many years before, the professionals at the firm cheated on ethics exams by using and circulating answer keys. For example, over 200 EY audit professionals across the country exploited a software flaw in the firm’s CPE testing platform to pass exams while “answering only a low percentage of questions correctly.” And, many audit professionals who knew of the lies, the unethical conduct, but failed to stand up and say anything to try and halt it.

As the Order in this matter states: The “gatekeeping role depends on the integrity not only of the independent audit firm’s audit personnel, but of its management and its attorneys.” This point is reflected in the federal securities laws, the PCAOB rules and the Code of Professional Conduct of the AICPA. Yet despite widespread information at the firm about cheating, and confirmation of the unethical conduct by an internal investigation, the firm failed to correct a submission to the Commission stating that it “did not have any current issues with cheating.” The Order concludes that the firm willfully violated PCAOB Rule 3500T regarding ethical standards in the AICPA Code and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice.

In resolving the matter, the firm agreed to implement certain undertakings. Those include the retention of an Independent Consultant and a requirement to conduct a review of the firm’s policies and procedures.

The firm consented to the entry of a cease-and-desist order based on PCAOB Rule 3500T and a censure. The firm will also pay a penalty of $100 million.

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