Risk & Compliance

UBS Fined $19M in First Structured Note Case

The SEC said the bank misled investors in offering materials for structured notes tied to a proprietary currency index.
Matthew HellerOctober 15, 2015

UBS AG has agreed to pay $19.5 million to settle the first U.S. regulatory action alleging misleading statements and omissions in offering materials for structured notes.

The Securities and Exchange Commission said UBS sold about $190 million of medium-term notes linked to the V10 Currency Index with Volatility Cap between December 2009 and November 2010, telling investors that the underlying V10 trading strategy was “transparent” and “systematic.”

The V10 was a proprietary index, developed and sponsored by UBS, that measured the performance of a hypothetical algorithmic trading strategy designed to identify and
exploit trends in G10 foreign exchange forward rates, the SEC said.

UBS is one of the world’s largest issuers of structured notes, which typically consist of a debt security with a derivative tied to the performance of other securities, commodities, currencies, or proprietary indices. The return on the structured note is linked to the performance of the derivative over the life of the note.

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According to the SEC, the V10 strategy was “neither transparent nor systematic” as UBS did not disclose to investors that it took unjustified markups on hedging trades, engaged in hedging trades with non-systemic spreads, and traded in advance of certain hedging transactions.

As a result of the markups and spreads, the SEC said in an administrative order, the VIO Currency Index was depressed by approximately 5%, causing investor losses of about $5.5 million.

“This case demonstrates the importance of being truthful in offering materials to be used in the offer and sale of structured notes to retail investors,” Andrew Ceresney, director of the SEC’s Division of Enforcement, said in a news release. “We will remain focused on protecting investors who are not in a position to protect themselves by virtue of their limited access to information, the complexity of the product, or both.”

Ceresney told reporters on Tuesday that the SEC has a number of active investigations involving structured notes.

In the wake of the financial crisis, the SEC said, UBS “perceived that investors interested in diversifying their stock and bond portfolios were attracted to these types of structured products so long as the underlying trading strategy was transparent.”

But the unjustified markups on hedging trades allegedly resulted in market prices not being used consistently to calculate the V10 index. In addition, the SEC said, UBS did not disclose that certain of its traders added spreads to the prices of hedging trades largely at their discretion.