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Nancy Condon (202) 728-8379
Michelle Ong (202) 728-8464

FINRA Fines UBS Financial Services $2.5 Million; Orders UBS to Pay Restitution of $8.25 Million for Omissions That Effectively Misled Investors in Sales of Lehman-Issued 100% Principal-Protection Notes

WASHINGTON — The Financial Industry Regulatory Authority (FINRA) announced today that it has fined UBS Financial Services, Inc., $2.5 million, and required UBS to pay $8.25 million in restitution for omissions and statements made that effectively misled some investors regarding the "principal protection" feature of 100% Principal-Protection Notes (PPNs) Lehman Brothers Holdings Inc. issued prior to its September 2008 bankruptcy filing.

PPNs are fixed-income security structured products with a bond and an option component that promise a minimum return equal to the investor's initial investment.

From March to June 2008 as the credit crisis worsened, UBS advertised and some UBS financial advisors described the structured notes as principal-protected investments and failed to emphasize they were unsecured obligations of Lehman Brothers, which eventually filed for bankruptcy in September 2008.

FINRA found that UBS:

  • failed to emphasize adequately to some investors that the principal protection feature of the Lehman-issued PPNs was subject to issuer credit risk;
  • did not properly advise UBS financial advisors of the potential effect of the widening of credit default swap spreads on Lehman's financial strength, or provide them with proper guidance on the use of that information with clients;
  • failed to establish an adequate supervisory system for the sale of the Lehman-issued PPNs, and failed to provide sufficient training and written supervisory policies and procedures;
  • did not adequately analyze the suitability of sales of the Lehman-issued PPNs to certain UBS customers;
  • created and used advertising materials that had the effect of misleading some customers about specific characteristics of PPNs

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."

FINRA found that some of UBS' financial advisors did not understand the product, including the limitations of the "protection" feature. Consequently, certain financial advisors communicated incorrect information to their customers. Also, certain advertising materials had the effect of misleading customers regarding the characteristics and risks of the PPNs, including the nature, scope and limitations of the 100% Principal-Protection Notes. The materials suggested that a return of principal was guaranteed if customers held the product to maturity; however, UBS did not adequately address the importance that credit risk could result in loss of principal.

UBS's suitability procedures were also lacking. UBS did not have risk profile requirements for certain PPNs; therefore, the PPNs were sold to some investors for whom the product was not suitable, including investors with "moderate" and "conservative" risk profiles. Moreover, these particular investors were more likely to rely on UBS' representations about the "100% principal protection" feature of Lehman PPNs because of their risk averse investment objectives.

In settling this matter, UBS neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

This investigation was conducted by senior counsels Audra Acquavella, Miranda Chatelain and Peter Schlossman, and investigators Karina Bjelland and Pradeepta Roy of the Enforcement Department, under the supervision of Myles Orosco, Enforcement Director, and Linda Riefberg, Vice President and Chief Counsel, with the assistance of FINRA's Advertising Regulation Department.

Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA's BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2010, members of the public used this service to conduct 17.2 million reviews of broker or firm records. Investors can access BrokerCheck at or by calling (800) 289-9999.

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