FINRA recently fined UBS Financial Services, Inc. $2.5 million for "omissions and statements made that effectively misled some investors regarding the
‘principal protection' feature of 100% Principal-Protection
Notes (PPNs)" issued by Lehman Brothers Holdings (FINRA
News Release). UBS also was ordered to pay $8.25 million in restitution.
PPNs, fixed-income securities that promise a minimum return equal to an
investor's initial investment amount, were widely popular in the years
leading up to the credit crisis. Financial advisers often marketed and
recommended the products to investors who wanted to grow their investment
accounts with little risk. Unfortunately, many of the financial advisers
who recommended the products didn't understand the limitations of
the "principal-protection" guarantee, or that an issuer's
credit risk could render it virtually meaningless.
According to FINRA, just months before Lehman Brothers filed for bankruptcy
in the fall of 2008, UBS and its financial advisers marketed and represented
Lehman-issued PPNs as principal-protected investments without adequately
informing clients that the notes were unsecured products. They also either
failed to understand the potential for losses associated with Lehman's
credit risk or failed to inform clients of that potential.
In the release, Brad Bennett, FINRA Executive Vice President and Chief
of Enforcement, said: "This matter underscores a firm's need
to be clear and comprehensive in disclosing risks of the
structured products it sells to retail investors. In cases, UBS' financial advisors did
not even understand the complex products they were selling, and as a result,
they neglected to disclose necessary information to customers about the
issuer's credit risk so investors would understand the magnitude of
the potential losses."