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UBS Charged With Disclosure Violations in Sales of Structured Notes

UBS AG will pay $19.5 million to settle an SEC complaint that it misled investors in its sales of structured notes, marking the first such charges to be brought by the commission. The Swiss bank is one of the largest issuers of structured notes, which are hybrid financial products that include both a debt security and an embedded derivative.

UBS AG will pay $19.5 million to settle an SEC complaint that it misled investors in its sales of structured notes, a class of complex financial products that include both a debt security and an embedded derivative.

The complaint is the first the U.S. market regulator has brought for securities law violations involving structured notes.

UBS is among the largest issuers of structured notes. The derivatives involved in the complaint were tied to the performance of a complex proprietary currency index designed by the Swiss bank called the “V10 Currency Index with Volatility Cap.”

In 2009 and 2010 UBS issued about $190 million of the notes to some 1,900 retail investors, most of which carried a three-year term, according to the SEC’s cease-and-desist order. In offering documents, the bank pitched the securities as giving investors access to a “transparent and systematic currency trading strategy” through an index based on market prices.

“In the wake of the financial crisis, UBS perceived that investors interested in diversifying their stock and bond portfolios were attracted to these types of structured products so long as the underlying trading strategy was transparent,” the SEC wrote in the order.

UBS did not, however, disclose hedging transactions by its employees in Switzerland that manipulated the index price in a way that harmed investors, the SEC said.

“In reality, the V10 was neither transparent nor systematic, market prices were not consistently used to calculate the index, and V10 Investors were thereby misled as to certain key features of this complex financial instrument,” the order said.

Investors lost about $5.5 million as a result of UBS’ undisclosed transactions. Under the SEC settlement, UBS will return the amount investors lost as part of its total $11.5 million in disgorgements and prejudgment interest. The bank will also pay a penalty of $8 million.

UBS provided “substantial cooperation” with the SEC during the investigation, according to the order. It neither admitted nor denied any wrongdoing as part of the settlement.

The bank called itself “pleased to have resolved this legacy matter with the SEC,” in a statement from a spokesperson. “UBS is firmly focused on the future with an unwavering commitment to upholding a culture of doing the right thing and reducing operational risks.”

The charges revolve around disclosure failures, and not on the conduct of UBS traders in Switzerland, which is generally outside of SEC regulation, Andrew Ceresney, the agency’s enforcement chief, said during a conference call with reporters.

In a statement, SEC Chair Mary Jo White said “this first-of-its-kind case involving misstatements and omissions by a structured notes issuer shows that the SEC continues its commitment to pursue wrongdoing across the securities industry in order to better protect investors.”

In January, the SEC issued a warning to retail investors about the complexity and risks of investing in structured notes.

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