The Financial Industry Regulatory Authority has censured UBS and fined the bank $850,000 for failing to supervise a registered representative’s sale of unapproved annuities offered by his college friend and business acquaintance.
Finra alleged in its disciplinary letter, released Monday, that UBS failed to create a “reasonably designed” supervisory system to monitor the transfer of customer funds to unapproved third parties. The firm also failed to address red flags related to a rep’s request for numerous wire transfers of client funds to an unapproved annuities company, Finra said.
As a result, UBS failed to detect that the registered representatives had his clients invest a total of about $7.2 million in fixed annuities offered by a third party that was "formed by the representative's college friend and business acquaintance,” the agency said in its disciplinary letter.
Finra said that 10 of the rep's customers bought a total of $1.8 million worth of the annuities via 64 wire transfers, using funds wired directly from their UBS accounts to the unapproved annuities company.
UBS had never approved or offered the annuities, Finra said.
“The firm failed to detect that its registered representative had sold investments offered by [an unauthorized annuities company] to UBS customers, at least 10 of whom wired money to the company from their UBS accounts. Given the hundreds of thousands of outgoing third-party wire transfers that UBS processed each year, the firm's failure to establish any system to surveil for transfers was unreasonable,” Finra said.
UBS settled with Finra without admitting to or denying the findings. The firm did not immediately respond to a request for comment.
The bank also failed to reasonably respond to red flags that its representative was participating in private securities transactions involving the annuities company. One such red flag involved the rep’s sales assistant sending an email to a supervisor to ask that the wire transfer fee be waived and identifying the unapproved annuities company, according to the settlement.
“Instead, the supervisor approved the request to waive the wire transfer fee, without following up with the representative or contacting the customer about the wire transfer request. The customer then wired $20,000 to [the unauthorized annuities company],” Finra said.
While UBS flagged at least 17 of the wire transfers for review, the firm still failed to properly investigate them, Finra said.
UBS didn't detect or respond to the unauthorized “selling away” until the fall of 2021, when one of the rep's former customers tried to withdraw her investment. The rep’s customers who invested in the company lost most, if not all, of their investments, Finra said.
Once UBS identified the issue, it repaid the customers their principal and interest, for total restitution of more than $17 million, the regulatory watchdog said.
The failure to supervise wire transfers “is a big deal across the industry, especially at wirehouses, because it’s so easy for reps to literally steal large amounts of money from client accounts with little effort,” said Michael Edmiston, an attorney with Jonathan W. Evans & Associates in Los Angeles.
“The broker-dealers are getting better at self-policing but are still slow to find solutions to keep client funds safe,” said Edmiston, who is also a past president of the Public Investors Advocate Bar Association (PIABA).