UBS fined for downplaying risk of Lehman principal-protection notes

By Angela McDaniels

Tacoma, Wash., April 11 - The Financial Industry Regulatory Authority said it fined UBS Financial Services, Inc. for effectively misleading some investors about the principal protection feature of 100% principal-protection notes issued by Lehman Brothers Holdings Inc. prior to its September 2008 bankruptcy filing.

UBS was fined $2.5 million and ordered to pay $8.25 million of restitution, according to a Finra news release.

Finra found that UBS:

• Failed to emphasize adequately to some investors that the principal protection feature of the notes was subject to issuer credit risk;

• Did not properly advise UBS financial advisers 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 principal-protected notes and failed to provide sufficient training and written supervisory policies and procedures;

• Did not adequately analyze the suitability of sales of the Lehman-issued principal-protected notes to some UBS customers; and

• Created and used advertising materials that had the effect of misleading some customers about specific characteristics of principal-protected notes.

"This matter underscores a firm's need to be clear and comprehensive in disclosing risks of the structured products it sells to retail investors," Brad Bennett, Finra executive vice president and chief of enforcement, said in the release.

"In cases, UBS' financial advisers 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."

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

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