UBS will pay $19.5 million to settle charges of improper disclosure in offering materials for a proprietary foreign-exchange trading strategy, the Securities and Exchange Commission announced Tuesday.
It is the SEC’s first case involving misstatements and omissions by issuers of retail structured notes, whose returns are linked to performance of a derivative over the life of the note. SEC officials estimate that up to $50 billion of structured notes are registered each year, with many sold to less sophisticated retail investors.
UBS, a large global issuer of structured notes, agreed to settle SEC charges that it misled U.S. investors in structured notes tied to the V10 Currency Index with Volatility Cap, by saying the investment relied on a “transparent” and “systematic” currency trading strategy using “market prices” to calculate the underlying financial instruments. According to the SEC order, undisclosed hedging trades by UBS reduced the index price by 5%, which caused 1,900 investors buying $190 million of the notes in 2009 and 2010 to lose $5.5 million. UBS will cover those losses as part of the agreement.
The SEC also cited UBS for the lack of an effective process to ensure that people in charge of producing offering documents were aware of hedging practices that could negatively impact price inputs used to calculate the V10 index. “It is critical that large global financial institutions have and implement policies and procedures designed to ensure that all facts relevant to investors are made known to individuals responsible for disclosures,” SEC Chairwoman Mary Jo White said in a statement.
Without admitting or denying the SEC’s findings, UBS agreed to avoid similar future violations, to disgorge $11.5 million in profits and interest, and to pay an $8 million civil penalty. SEC officials cited UBS’s “substantial cooperation” and remedial measures implemented voluntarily, in the order.
UBS spokeswoman Karina Byrne said in an e-mail that the firm is pleased to have resolved the legacy matter. “UBS is firmly focused on the future with an unwavering commitment to upholding a culture of doing the right thing and reducing operational risks," she said.
