UBS Financial Services Inc. (“UBS”) recently settled charges with the Securities and Exchange Commission (“SEC”) concerning its failure to adopt and implement suitable investment policies for volatility-linked exchange-traded products (“ETPs”) from January 2016 to January 2018. The SEC found that UBS’s discretionary Portfolio Management Program (“PMP”) financial advisors purchased and held the iPath S&P 500 VIX Short-Term Futures ETN (“VXX”) for advisory clients, which was inconsistent with the product’s intended purpose as outlined in offering documents and communicated to UBS by the issuer of VXX.

In response to the SEC’s findings, UBS agreed to a settlement without admitting any wrongdoing. The terms of the settlement include a censure, disgorgement, and prejudgment interest totaling $112,274, as well as a civil penalty of $8 million. The funds from the penalty will be distributed to investors affected by UBS’s actions.

SEC Order Details

The SEC filed a settled action against UBS on July 19, 2021, citing compliance failures related to the sale of a volatility-linked exchanged-traded product. The investigation revealed several key points:

1. Some PMP financial advisors began purchasing VXX for advisory clients as early as 2016 and held the investment for extended periods, with some accounts holding VXX for over a year.
2. VXX is designed to provide exposure to the implied volatility of the S&P 500 through a rolling portfolio of one and two-month futures contracts on the VIX. Extended holding periods caused the value of VXX to decrease due to roll costs, even if the VIX remained flat or positive.
3. UBS lacked written policies and procedures to prevent the unsuitable use of VXX as a buy-and-hold investment for PMP advisory clients. While the firm had controls in place for monitoring holding period risk for other products, similar measures were not implemented for VXX.
4. Although UBS had a concentration limit of 3% on volatility-linked ETPs in PMP accounts, this policy addressed concentration risk but not the duration of VXX holdings.
5. UBS adopted written policies to monitor PMP accounts for compliance with the concentration limit on a daily basis and take escalating actions in case of violations. However, this monitoring and enforcement system was not effectively implemented.
6. During the relevant period, approximately 1,882 PMP client accounts held VXX for extended periods, resulting in significant losses on their VXX investments.
7. In October 2017, UBS made VXX ineligible for holding in PMP accounts, prohibiting further purchases, and requiring existing positions to be exited by January 2018.