UBS Receives Multi-Million Dollar Fine for Omissions in Sale of Structured Notes

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."


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