Daniel Michael, chief of the U.S. Securities and Exchange Commission (SEC) Enforcement Division’s Complex Financial Instruments Unit noted that it is an advisory firm’s responsibility to protect its clients from inappropriate investments in complex financial products.1 As a result of the Enforcement Division’s exchange-traded product (ETP) initiative, on July 19, the SEC settled an action against UBS Financial Services, Inc. for compliance failures relating to sales of a volatility linked ETP. This action by the SEC Enforcement Division is the sixth time during this ETP initiative that the Division has cited an advisory firm for violations related to ETP sales.
An ETP is a financial product that is publicly traded similar to a bond in the stock market.2 ETPs are types of securities that track underlying security, index or financial instruments and so their prices can fluctuate from day-to-day, and throughout a day, with the share price being derived from the underlying investments that they track.3
One of the largest exchange traded funds (a type of ETP) in the marketplace is the SPDR S&P 500 ETF with $374 billion in net assets as of August 27, 2021.4 This ETF, for example, owns shares of some of the most well-established companies in the world such as Mastercard, Home Depot, McDonald’s, Facebook, Amazon and JP Morgan Chase.5 ETPs, like the SPDR S&P 500 ETF, are gaining in popularity because they are a low-cost alternative to mutual funds and actively-managed funds and they can provided additional liquidity. However, ETPs have the risk of market losses as their prices fluctuate; they have varying trading volumes which can affect liquidity; and, exchange-traded notes (ETN), another form of ETP, can behave similar to debt instruments.6
The SEC alleged in the action against UBS that the company “failed to adopt and implement written policies and procedures reasonably designed to prevent unsuitable investments in volatility-linked exchange traded products between January 2016 and January 2018.”7 This resulted in UBS financial advisers purchasing and holding a specific ETP for an extended period of time resulting in unnecessary investor losses. The ETP was iPath S&P 500 VIX Short-Term Futures ETN, trading as VXX. Starting in January 2016 financial advisers purchased VXX for hundreds of clients, holding the exchange traded notes for periods of a year or more even though this was inconsistent with the purpose of the product as described in offering documents and in meetings between UBS and VXX representatives.
The constant daily buying and selling of the VXX futures contracts generate roll costs which are deducted from VXX returns, decreasing the VXX value when held for extended periods, even if the VXX remains flat or positive during that period. UBS had controls and systems in place to monitor holding period risk for other products, but not for the VXX product. UBS also failed to implement its written policies that required the firm to monitor the accounts of the Portfolio Management Program (PMP) clients (who were sold the VXX product) for compliance with a three percent concentration limit on volatility-linked ETPs, and take action if an account violated the limit.
In October 2017, UBS voluntarily prohibited advisers from adding VXX to PMP client accounts and required advisors with client PMP accounts with VXX holdings to exit those positions by January 2018.
UBS did not admit or deny the SEC findings in this matter. UBS agreed to censure, and to cease and desist from violating Section 206(A) of the Advisers Act and Advisers Act Rule 206(4)-7;B, as well as payment of disgorgement, prejudgment interest and a civil monetary penalty totaling $8,112,274. That amount will go into a Distribution Fund, with payments from the fund made to PMP clients who incurred losses from VXX as a result of investments made between January 1, 2016 and January 31, 2018.
Our Securities Law Firm in Detroit Michigan has more than twenty years of experience in securities litigation, broker misconduct, FINRA assistance and more. We hold brokers accountable for their negligent acts, recover losses and advocate for our client’s rights. If you have questions about your investments or how your investment accounts are being managed by your broker call and speak to one of our Securities Attorneys today.
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1 UBS Settles Charges Related to Investments in Complex Exchange-Traded Product, 7/9/2021
Link: https://www.sec.gov/news/press-release/2021-130
2 What is an Exchange Traded Product?
Link: https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/exchange-traded-product-etp/#:~:text=Summary%201%20An%20exchange-traded%20product%20%28ETP%29%20refers%20to,asset%E2%80%99s%20return%2C%20with%20convenient%20share%20tradability%20and%20access.
3, 5, 6 What is an Exchange Traded Product?
Link: https://www.investopedia.com/terms/e/exchange-traded-products-etp.asp
4 SPDR S&P 500 ETF Trust (SPY)
Link: https://finance.yahoo.com/quote/SPY/performance?p=SPY
7 SEC Administrative Proceeding File No. 3-20401, 7/19/2021
Link: https://www.sec.gov/litigation/admin/2021/ia-5781.pdf