Using new, big data investigative capabilities to identify broker-dealer misconduct, the SEC fined UBS $15 million for systematically failing to train its advisers in complex products they sold to unsophisticated investors.

Image: Bloomberg
Image: Bloomberg

Investors depend on their brokers' education and knowledge, the SEC's director of enforcement, Andrew Ceresney, said in a press conference.

"That is especially true where a product is complex," he said, "and that is where UBS failed."

The case centered on the sale of $548 million of reverse convertible notes to retail investors over a roughly three year period, according to the SEC. The commission trawled the data of the broker-dealer to identify a pattern of misbehavior, Ceresney said, adding that the commission now can analyze hundreds of millions of trading records to pursue an action.

"Today's case demonstrates our ability to harness the power of big data analytic techniques to identify misconduct within the broker-dealer community on a platform-wide basis," he said. "We used these analytics in this case to take the data of structured product sales by UBS and detect a pattern of sale to a specific category of investors."
He put other BDs on notice that the commission is prepared to bring other similar pattern-driven cases.

"Whereas in the past we would have had to prove this case on a customer-by-customer basis, we were able here to show a compelling pattern of sales constituting a potential violation without a customer-by-customer analysis," he added. "That results in a much more efficient investigation."

Without admitting or denying guilt in the case, UBS agreed to pay the fine. The firm also offered to implement new improved procedures for offering these products, Ceresney said. "We are pleased to have resolved the matter," said UBS spokesman Gregg Rosenberg in a released statement.

"The settlement," according to the statement, "is related to reverse convertible notes, with a single stock as the underlying asset. The notes were sold to clients between 2011 and 2014." During that time period, UBS sold approximately $548 million of the notes to more than 8,700 relatively inexperienced retail customers, the commission found.

The products are complex synthetic options whose performance is driven by the concept of "implied volatility," which purports to protect clients' assets in down markets, Ceresney said.

However, it also creates the risk that an investor could lose a significant amount of money, he added.

Knowing that its brokers were soliciting sales to customers, UBS failed to adequately educate and train its sales force about the product's risks, he added. In particular, it did not explain the complex "options-based nature of the investment and some of the potential downside," he said.

Given the recent strength of the markets, most of the products actually performed well for their clients, Ceresney said, but added the commission brought the case given the problematic pattern it uncovered.

This is the commission's third case involving the sale of structured notes.


None of the $15 million fine will go to clients, Ceresney said.

While the commission deserves praise for upping its data analysis abilities, Hugh Berkson, president of the Public Investors Arbitration Bar Association, questioned whether the fine in this case would impact UBS materially, given that it sold $548 million sales of the notes.

PIABA frequently represents investors in cases in which they've lost substantial sums to large firms that sold them complex products that financial experts would be challenged to understand, Berkson said.

"Trust me," he said of the $15 million UBS fine, "They made more than that in profit."

Rosenberg, the UBS spokesman, did not immediately respond to a request for comment on Berkson's remark.