UBS Financial Services will pay $24.6 million to settle charges the firm was aware of the program’s significant risks and yet knowingly provided its advisors with inadequate training, the Securities and Exchange Commission announced.

The settlement follows a flurry of Finra arbitrations related to the firm's Yield Enhancement Strategy (YES) over the last six months, in which retail customers who were directed to a YES investment have been winning awards greater than their losses.

“I think that’s been a big feature in these cases,” said Stefan Apotheker, a senior associate trial attorney with Erez Law, Miami. “Since March we’ve tried four of these cases with $4.2 million in losses, and the complainants were awarded $7.36 million. We think the panels are recognizing that the way this was being marketed and sold to advisors and clients is markedly different to what UBS knew the risks were.”

His most recent case, for example, alleged clients Jeff and Karen Misner lost about $393,000 after their UBS advisor sold them on the YES program, and the Finra panel awarded $475,482 in compensatory damages, $500,000 in punitive and another $366,636 in attorneys’ fees and costs, for a total of $1,342,000, the Finra award filing stated.

Apotheker said his firm has another dozen cases pending.

The SEC’s findings related specifically to the period between February 2016 and February 2017, during which time UBS marketed and sold the YES program to some 600 advisory clients who committed about $2 billion in assets to what was considered by all to be a complex investment strategy, acording to the agency.

“UBS provided its financial advisors inadequate training or dedicated supervisory oversight in this complex options trading strategy. ... As a result [a certain number] of them did not understand the significant downside risk,” the SEC said.

In early 2017, UBS held a comprehensive “front-to-back” review of how advisors were marketing the program to clients, and based on the findings rolled out formal training and other enhanced supervisory controls, the SEC said.

In a prepared statement, UBS said it "is pleased to have amicably resolved this matter related to training provided between February 2016 and February 2017 for an options overlay strategy. UBS appreciates the SEC’s acknowledgment that in early 2017, UBS voluntarily remediated the issue by enhancing its risk control framework and strengthening its training program for the strategy.”

The settlement called for disgorgement of $5.8 million plus prejudgment interest of $1.4 million and a $17.4 million civil monetary penalty.

The SEC filing provided significant details as to how YES, which has been shut to new investors since 2018, operated within the UBS stable of offerings.

According to the filing, the YES strategy was developed by a team at Credit Suisse Securities, whom UBS recruited in late 2015 as Credit Suisse was getting out of the advisory business, paying them upfront awards of about $50 million. At the same time, UBS also recruited a number of Credit Suisse financial advisors, and collectively the group brought 300 client accounts with about $1 billion in YES investments.

These clients, the SEC found, were very much aware of the downside risks of YES, which relies on a complicated options strategy known as an “Iron Condor” that generally sells short-term put and call options on the S&P 500 and hedges those positions by purchasing below-markets puts and above-market calls with the same duration.

“Most, if not all, [of these clients] nevertheless continued with the program given its successful track record at Credit Suisse,” the SEC said.

In explaining the investment to new advisors and new clients, the YES team claimed the strategy produced returns of about 3% to 5% a year, with a worst-case historical loss of 1% per year. About 600 new clients invested $2 billion during the UBS YES roll-out, the SEC said, and those new clients produced net profit of $5.8 million out of $9.6 million for the total program during the relevant period.

Internally, however, UBS had a different calculation for downside risk, the SEC said.

“According to UBS’s internal risk reports, YES’s potential maximum losses generally ranged between 10% and 20% during the Relevant Period. The internal risk reports were not shared with financial advisors or clients,” the SEC said. “Certain clients who invested in YES during the Relevant Period would not have invested in YES had they known the significant downside risk, and believed their financial advisors would not have recommended YES had they appreciated those risks.”

Those risks began to materialize in early 2018 as market volatility increased. When the S&P 500 fell 15% between Dec. 2, 2018, and Dec. 25, 2018, and then rallied to finish the month down 11%, the YES strategy suffered a 13% loss for the month and an 18% loss for the year, the SEC said. That’s when the program shut to new investors.

“It’s a pretty unusual thing to for a program to be closed like that,” Apotheker said. “I’ve known of other funds that have shut down and unwound. But this seems like it’s essentially liquidation only, or investors stay pat. I don’t think that the SEC action has affected this. The program was headed down this road anyway.”