UBS Financial Services to Pay Over $15M to Settle Charges Related to the Sale of Reverse Convertible Notes to Retail Investors

The U.S. Securities and Exchange Commission (SEC) said that UBS Financial Services (UBS) has consented to pay over $15 million to resolve civil charges accusing it of not adequately training and educating sales team members regarding complex financial products that were sold to retail investors. According to the SEC’s order, UBS did not put into place procedures and policies that were reasonably designed to train and educate registered representatives about making suitable recommendations regarding reverse convertible note sales. The purported lack of education and training caused certain firm representatives to fail to adequately understand the nature of the reverse convertible notes they were selling.

The SEC is accusing UBS of inadequate supervision from 2011 through 2014. The regulator said that because of these supervisory issues, the firm did not prevent the resulting violations of securities laws through the wrongful sale of reverse convertible notes. It was during this time that UBS Capital Markets’ Structured Solutions unit structured about 2,500 reverse convertible notes that were based on 425 underlying stocks. As a result, claims the SEC, UBS registered representatives sold about $548 million in reverse convertible notes to over 8,700 unsophisticated retail investors. As is typical with such consent judgments and settlements, UBS is neither admitting nor denying the SEC’s findings.

Reverse Convertible Notes

Reverse convertible notes are complex structured note products that are not suitable for most investors. They are often high risk and very volatile. The notion of implied volatility drives the performances of reverse convertible notes. They are debt obligations of the issuer and linked to the performance of a securities basket or an unrelated security. They are not for everyone and they come with certain risks.

It is the responsibility of brokerage firms to make sure that a structured product is suitable for an investor before recommending it. This means that the investment must be suitable not just for a portfolio, and the degree of risk the investor can handle, but also it has to be compatible with the customer’s investment goals.

Our reverse convertible note fraud lawyers work with investors in recouping their losses. Contact Shepherd Smith Edwards and Kantas, LTD LLP today.

Read the SEC Order in this case (PDF)