Complex Products, A Recurring Enforcement Theme

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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