UBS has reached a $3.5 million settlement to resolve allegations of supervisory failures tied to short-term trading in preferred stocks by its brokers.
The violations, as outlined by Finra, occurred between January 2017 and December 2018 and involved at least 22 representatives or teams who advised clients to buy preferred stocks and sell them within 180 days, often to the clients' detriment.
Finra, the brokerage industry’s self-regulatory body, alleged that UBS lacked adequate systems to assess whether these trading recommendations were suitable for clients. As a result, clients suffered financial losses on these transactions, while brokers benefited from commissions and sales concessions.
UBS neither admitted nor denied the allegations in settling the case and has not provided any public comment on the matter.
Conflicts of Interest in Syndicate Preferred Stock Sales A key issue in this case revolves around UBS’s role as a member of the selling syndicate for the preferred stocks in question. When UBS brokers sold shares of these securities, the firm received sales concessions, typically around 2%, which it then shared with its representatives. These income-generating securities, which generally offer higher payments than many bonds and provide more consistent income than common stocks, are designed for long-term holding, according to Finra.
However, Finra found that numerous UBS brokers engaged in extensive short-term trading of these securities. Over the two-year period, they executed more than 38,000 trades with a total principal value exceeding $2 billion.
Problematic Patterns and Practices Finra raised concerns about the potential for abuse in these transactions, noting that brokers could recommend the purchase of a preferred stock, earn a front-end sales concession, and then suggest a short-term sale of the security, often to reinvest in another preferred stock. This cycle allowed brokers to repeatedly collect commissions while exposing clients to unnecessary transaction costs and risks.
The regulator underscored the importance of suitable practices for income-focused investments like syndicate preferred stocks. These instruments are typically held long-term to maximize their income-generating potential, but the repeated short-term trading observed at UBS undermined this fundamental investment objective.
Gaps in Supervision and Oversight One of Finra’s primary criticisms was UBS’s lack of written procedures or guidance for representatives regarding appropriate holding periods for syndicate preferred stocks. While UBS had implemented an electronic monitoring system to flag short-term trading activity, Finra found the system to be significantly flawed.
The monitoring tool, known as the Preferred Securities Frequent Trading Report, only flagged trades where securities were held for fewer than 90 days. This narrow scope failed to identify trades held for up to 180 days, leaving a substantial amount of short-term trading unreviewed. Moreover, the system primarily focused on the most active short-term traders, further limiting UBS’s ability to detect broader patterns of misconduct.
Financial Penalties and Restitution As part of the settlement, UBS agreed to pay a $500,000 fine, provide restitution of $343,914.66 plus interest to affected clients, and disgorge $2,645,537 plus interest. The firm also accepted a formal censure, signaling the seriousness of these supervisory lapses.
Implications for Wealth Advisors and RIAs This case underscores the importance of robust supervisory systems and clear guidelines in wealth management practices. For RIAs and wealth advisors, it serves as a critical reminder to:
Align Investment Strategies with Client Objectives: Ensure that recommended securities align with the client’s long-term goals and risk tolerance, particularly for income-generating investments.
Monitor Trading Patterns: Implement comprehensive monitoring systems that can flag unusual trading activity across all relevant timeframes, avoiding gaps in oversight.
Provide Clear Guidance to Representatives: Develop and enforce written policies that define appropriate trading practices and holding periods for specific asset classes, such as preferred stocks.
Manage Conflicts of Interest: Transparently address any conflicts that may arise from compensation structures, such as sales concessions, to maintain client trust.
By maintaining stringent compliance protocols and fostering a client-first approach, wealth advisors and RIAs can mitigate risks and strengthen their professional credibility. The UBS case highlights how even large firms can face significant penalties when supervision and alignment with client interests fall short.
