The Commission brought its first case tied to inadequate disclosure regarding structured notes. The complex instruments, a debt security linked to a derivative tied to the performance of other products, are frequently marketed to relatively unsophisticated retail investors. In the Matter of UBS AG, Adm. Proc. File No. 3-16891 (October 13, 2015).
In the wake of the financial crisis UBS, a financial institution based in Switzerland, determined that investors were interested in instruments that are transparent and systematic. Based on those concepts the financial institution began marketing Notes tied to the V10 index. The notes did not pay interest and typically had a three year term. At maturity the investor received a cash payment dependent on the performance of the V10, a proprietary index that measured the performance of a hypothetical algorithmic trading strategy designed to exploit trends in G10 foreign exchange rates. The trading strategies typically used six month forward contracts tied to a G10 member currency. Different strategies were followed depending on the volatility of the markets.
Beginning in late 2009, and continuing until the Fall of 2010, UBS issued about $190 million in V10 linked Notes. The sales were made as registered offerings using automatic shelf registration statements. Overall there were eleven offerings. UBS officials in published articles emphasized the fact that the product was transparent.
What investors were not told is that certain actions taken by UBS negatively impacted the product. Specifically, for a period in 2010 UBS employees in Switzerland added mark-up to hedge transactions on switch days – days when the strategy was shifted based on market conditions. This resulted in lower prices being used to calculate the Index that were not consistent with market prices. Similarly, from May 2010 through December 2011 UBS added spreads to the positions used to hedge the V10 instruments. This action, which was not adequately disclosed, lowered the Index by about 4% because the prices from the spread trades were used as inputs to calculate it. Finally, for a fifteen month period beginning in May 2010 UBS traded ahead of internal V10 hedging transactions. These transactions made the product less than transparent and systematic, the points used to sell it to investors.
UBS failed to disclose the impact of the these transactions on the Index because it did not have an effective policy, procedure or process to make the individuals with primary responsibility for reviewing the offering documents and monthly reports aware of the conduct and its impact. As a result those documents were inaccurate. The Order alleges violation of Securities Act Section 17(a)(2).
To resolve the proceeding UBS consented to the entry of a cease and desist order based on the Section cited in the Order. The firm also agreed to pay disgorgement of $10 million, prejudgment interest and a penalty of $8 million. $5.5 million of the disgorgement will be deposited in a segregated account for the benefit of the V10 investors.