From the May 01, 2011 issue of Futures Magazine • Subscribe!

When is principal protection something else?

Managed Money Review

he Financial Industry Regulatory Authority (Finra) in April fined UBS Financial Services, Inc. $2.5 million, and required UBS to pay $8.25 million in restitution for omissions and misleading statements regarding structured products based on Lehman Brothers debt.

The group of products, 100% Principal-Protection Notes (PPNs) Lehman Brothers Holdings Inc., were issued prior to the September 2008 Lehman bankruptcy. PPNs are fixed-income security structured products with a bond and an option component that promise a minimum return equal to the investor’s initial investment.

According to Finra, UBS advertised, and some UBS financial advisors described, the structured notes as principal-protected investments and failed to emphasize they were unsecured obligations of Lehman Brothers.

Finra Chief of Enforcement Brad Bennett said in the release, "This matter underscores a firm’s need to be clear and comprehensive in disclosing risks of the structured products it sells to retail investors." Bennett added that in some cases, "UBS’s financial advisors did not even understand the complex products they were selling."

UBS consented to Finra’s findings and made the following statement: "UBS is pleased to have resolved this Finra matter, under which UBS is required to reimburse a limited number of investors who purchased certain Lehman principal protection notes during a discrete 3-1/2 month period of time. The significant majority of UBS’s Lehman structured product sales were conducted properly and any client losses were the direct result of the failure of Lehman Brothers in 2008."

That the products were open to retail investors and had no eligibility requirements played a part in the case, according to the Finra letter of Acceptance, Waiver and Consent. Individual investors with conservative risk profiles based on information they provided UBS will be reimbursed 100% of their losses; investors with moderate profiles and less than $1 million in investable assets will be reimbursed 50%. Corporate accounts are not eligible for restitution.

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