FINRA announced today that it has sanctioned UBS Financial Services for sales practice issues relating to sales of Lehman-issued PPNS (principal protection notes). According to its press release, FINRA explained that it fined UBS $2.5 Million and ordered it to pay $8.25 million in restitution for "omissions and statements made that effectively misled some investors regarding the "principal protection" feature of 100% Principal-Protection Notes Lehman Brothers Holdings, nc. issued prior to its September 2008 bankruptcy filing." As with all FINRA settlements, UBS did not admit or deny the charges.
FINRA made findings that the firm failed to adequately emphasize (thats FINRA's word) that the protection feature was subject to credit risk, and that the firm did not adequately analyze suitability of the notes to certain customers, and failed to establish an adequate supervisory system for sale of these notes, among other findings. The press release also explained, "FINRA found that some of UBS' financial advisors did not understand the product, including the limitations of the "protection" feature. Consequently, certain financial advisors communicated incorrect information to their customers."
Joel's thoughts: This case is another example of product-based enforcement cases, somewhat similar to the very recent FINRA and SEC cases brought against firms for inadequate due diligence in private offerings. When selling non-traditional products (such as publicly traded stocks, bonds and mutual funds) firms must ensure that they have completed sufficient due diligence to understand the product and its features, that they effectively communicate information about the product to its sales reps., and that they put in place appropriate mechanisms to supervise the sale of the products. Recent disciplinary actions show that the failure to do so can be costly.
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