UBS is paying nearly $3.5 million to resolve allegations it failed to properly monitor brokers who were racking up sales fees through frequent trades of securities meant to be held for the long term.
UBS Financial Services, the Swiss banking giant's wealth management arm, entered into an agreement with the Financial Industry Regulatory Authority over its alleged lax supervision of trades that 22 of its registered representatives made between 2017 and the end of 2018 in a type of security known as syndicate preferred stocks. Syndicate preferred stocks are stock-bond hybrids whose owners receive dividends before holders of "common" stock.
They are generally meant to be long-term investments. But during the two-year period leading up to 2019, UBS representatives recommended purchases of 1,986 syndicate preferred stocks that were then resold within 180 days or less.
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FINRA, the broker-dealer industry's self-regulator, alleged UBS and its representatives made sales concessions from the issuer of the preferred stock every time one of their clients made a purchase. The firm and brokers would then collect commissions every time a client later sold one of the same securities.
"This practice is particularly concerning if the representative then solicits the customer to purchase a different preferred stock, again receiving a front-end sales concession," according to FINRA. "Multiple [UBS] representatives engaged in repeated short-term buying and selling of syndicate preferred stock."
All told, FINRA alleges UBS and its representatives made $2,645,537 in sales concessions and $343,914 in commissions from the rapid transactions. UBS has agreed to pay the concessions amount, plus interest, to FINRA as disgorgement of allegedly ill-gotten gains and is providing the commission amount to split among 315 clients as restitution. On top of that, it accepted a $500,000 fine.
UBS, which neither admitted to nor denied the allegations, declined to comment on the case.
FINRA specifically took UBS to task for failing to have a supervisory system set up to catch inappropriately frequent trades. The regulator noted that UBS ran its brokers' trades through an electronic monitoring system, but that safety net flagged only securities that were sold after being held less than 90 days.
As a result, only 40 of the nearly 2,000 questionable trades cited by FINRA showed up in UBS' internal reports. Even with those flagged transactions, according to FINRA, UBS often failed to follow up to see if something was amiss. FINRA said UBS did not have an adequate system for supervising short-term trades in place until early 2023.
Bill Singer, a securities lawyer and retired author of the
"So they knew there were supervisory problems," Singer said. "This is absolutely ridiculous. This occurred from 2017 to December 2018. And now, just days before Christmas, they decide to settle this in 2024?"
FINRA noted that its allegations arose following an extensive review of trades made through UBS. Regulators looked at more than 38,000 trades in preferred stocks made in the two years leading up to 2019.
Douglas Schulz, a securities expert and the president of Invest Securities Consulting, said FINRA's allegations paint a classic picture of a type of malpractice known as "churning" — engaging in rapid sales of securities solely for the purpose of generating commissions and other revenue. Despite regulators' attempts to clean up the industry, accusations of churning still emerge with some frequency.
FINRA, for instance, reached
He credited FINRA in its case against UBS for going beyond a simple fine and obtaining restitution for investors.
"We need more of this," Schulz said. "If we catch them doing this, we need regulators taking decisive action. We need serious fines and serious restitution because that's the only way you force firms to do a better job."
