Menu

Complex Investment Product Training Materials Under Fire

Securities and Derivative Litigation   |   Life, Annuity, and Retirement Solutions   |   FINRA Litigation, Enforcement and Investigations   |   December 22, 2016
Download   
Share Page

In September 2016, the SEC imposed an approximately $15 million penalty and disgorgement (in total) against UBS Financial Services Inc. (UBS) as part of a settled action alleging that UBS failed to adequately train its registered representatives. The representatives had sold complex financial products to UBS’s retail investors, many of whom had minimal investment experience and reported modest income and net worth.

The complex financial products at issue were risky, single stock-linked reverse convertible notes (RCNs), which contained embedded derivatives based on underlying stocks. To build its case, the SEC, along with its Enforcement Division’s Complex Financial Instruments Unit, used, for the first time, "big data" analysis tools to identify "platform-wide" sales patterns rather than engage in the more customary investor-by-investor review.

Here, the SEC’s data analytics ultimately led the SEC to conclude that UBS’s training materials were inadequate mainly because such materials did not fully explain the risks associated with the volatility of the underlying stock’s performance and the potential that the stock could close below the specified downside market protection level, or the availability of certain optionality features that could be exercised by the investor after the product’s issuance. The SEC also found that, because of inadequate training, education and supervision, UBS’s registered representatives did not fully comprehend the RCNs’ risks and rewards thereby causing them, in certain instances, to make unsuitable recommendations to individual retail investors. This conduct, the SEC noted, constitutes a fraud or deceit upon the purchaser in the offer or sale of the products in violation of Section 15(b)(4)(E) of the Exchange Act.

The SEC’s settled action against UBS enforces that broker-dealers who market complex and risky investment products to retail investors, particularly those with limited or no investment experience, must adequately train and supervise their sales staff on suitability determinations.


©2020 Carlton Fields, P.A. Carlton Fields practices law in California through Carlton Fields, LLP. Carlton Fields publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information and educational purposes only, and should not be relied on as if it were advice about a particular fact situation. The distribution of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship with Carlton Fields. This publication may not be quoted or referred to in any other publication or proceeding without the prior written consent of the firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our Contact Us form via the link below. The views set forth herein are the personal views of the author and do not necessarily reflect those of the firm. This site may contain hypertext links to information created and maintained by other entities. Carlton Fields does not control or guarantee the accuracy or completeness of this outside information, nor is the inclusion of a link to be intended as an endorsement of those outside sites.

Subscribe to Publications

Disclaimer

The information on this website is presented as a service for our clients and Internet users and is not intended to be legal advice, nor should you consider it as such. Although we welcome your inquiries, please keep in mind that merely contacting us will not establish an attorney-client relationship between us. Consequently, you should not convey any confidential information to us until a formal attorney-client relationship has been established. Please remember that electronic correspondence on the internet is not secure and that you should not include sensitive or confidential information in messages. With that in mind, we look forward to hearing from you.