UBS Reaches $25M Settlement with SEC Over Yield Enhancement Strategy (YES) Strategy

UBS has been asked to pay a sum of around $25 million by the Securities and Exchange Commission (SEC) on allegations of fraud that arise out of their complex in-house developed strategy known as the Yield Enhancement Strategy, or simply, YES.

The YES program was designed to lower exposure during times of market volatility and involved the placement of several options trades at varying strike prices, all with the same date of expiry. However, beginning in December 2018, investments under the strategy suffered significant losses.

Matthew Thibaut, a partner with Haselkorn & Thibaut, has many years of experience as both a former financial advisor and as an attorney who has previously defended broker-dealer firms, and his observation is that: “… it’s clear that UBS clients in some instances may have told clients one thing at the time they invested, and now those same clients who are questioning unexpected investment losses in their account are being told something quite different.”

SEC Charges

It is SEC’s contention that when UBS put the product on its shelf and sold it to around 600 investors in a year between February 2016 and February 2017, the domestic financial advisors through whom these sales were made had not been adequately trained or equipped with knowledge on the product strategy. This was revealed in an administrative document released recently.

Though the firm did recognize, and even document, the presence of significant risk in the strategy, it also failed to share data with both clients as well as advisors.

The document also contended that these failures led to the inability on part of the financial advisors to “form a reasonable belief that the advice they provided was in the best interest of their clients,” and “When investors suffered losses, many of them, along with their financial advisors, expressed surprise and closed their YES accounts.”

UBS Impact

What UBS has consented to, without admittance or denial of the findings:

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  • a cease-and-desist order
  • a censure
  • paying disgorgement of $5.8 million
  • paying prejudgment interest of $1.4 million
  • paying a $17.4 million civil monetary penalty

The UBS strategy, and investor losses arising out of it, have also resulted in a rash of arbitration claims against UBS, resulting in several million dollars being paid by UBS. Some arbitration panels, however, have ruled in favor of UBS.

Earlier this year, in January, a lawsuit was filed in the federal court in New York by one investor in a class-action suit on behalf of fifteen hundred investors who invested in YES, and himself.

What is the UBS Yield Enhancement Strategy

In this article, I discuss the risks of the UBS Yield Enhancement Strategy, which was marketed by the bank as a low-risk investment strategy. Although it was not market neutral, it did generate losses during periods of high market volatility. Further, it generated substantial fees and commissions for the bank and its advisors. Despite this, UBS is still receiving heavy scrutiny. As a result, more investors will likely file FINRA arbitration claims against it.

UBS Yield Enhancement Strategy was marketed as a low-risk investment strategy

This investigation focuses on the sale of the Yield Enhancement Strategy to investors at UBS, a financial services firm and multinational investment bank. This program was marketed as a low-risk investment strategy, but the risk of substantial losses was too high for most investors. The investment strategy entailed multiple fee-generating call and put options, and the brokerage firm stands to make a commission on these trades, no matter how poorly the portfolio performs.

The UBS Yield Enhancement Strategy (YES) has become the subject of numerous investment loss claims. The losses reportedly totaled over $1 billion, as investors suffered through high market volatility due to the oil price war and the COVID-19 pandemic. Many investors lost so much money, they decided to sue the bank and its brokerage. The firm has a dedicated legal practice to representing investors.

It was not market neutral

The UBS Yield Enhancement Strategy is under fire from investors after it failed to protect them against the risks of market volatility. The investment strategy is not market neutral and was probably not appropriate for most retail investors. A lawsuit filed by Jacques Andre Soileau and Jennifer Beth Plaucheau claims that UBS knowingly and willfully caused investors to lose tens of millions of dollars in the UBS YES. The Siegel trusts invested $8.5 million into the UBS strategy. The Siegel trusts were awarded $517,020, $1.171 million, and $11.7 million by a Boca Raton arbitration panel.

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The lawsuits allege that the YES program posed a significant risk to investors and failed to achieve its stated objectives. The YES program relied on opaque options trading strategies to achieve its goal of eliminating market risk for UBS customers. Although UBS claimed that the YES strategy offered investors a limited risk environment and an expected gain of two to three percent per year, many of these investors suffered substantial losses.

It generated losses during periods of high market volatility

A series of investment loss claims have been filed against UBS and its brokers and advisors over the “Yield Enhancement Strategy” (YES) program. The extreme volatility during the 2018 COVID-19 pandemic, oil price wars, and other factors have led to massive losses. The losses are estimated to be in excess of $1 billion. The firm and its advisors are under investigation by the Sonn Law Group.

During these periods of high market volatility, the yield enhancement strategy generated losses, but the broker could earn an extra 1.75% fee per client account, according to UBS. Although the losses were large, the net value of the account remained unchanged. In early 2017, UBS voluntarily remediated the issue. It increased its training and risk control framework, but many investors complained to FINRA that the firm had misrepresented the risks of the strategy.

It generated substantial fees and commissions

The UBS Yield Enhancement Strategy was a controversial product that generated considerable fees and commissions for brokerage firms. UBS sold leveraged municipal bond funds through brokers who received 4.5% gross commissions for purchases. The strategy was high risk, and UBS misrepresented it as a low-risk investment. In fact, the product can cause significant investment losses. Investors should be cautious about yield enhancer strategies.

The YES program was advertised as a low-risk investment strategy that would enhance returns over fixed-income market yields. UBS financial advisers marketed 3%-5% returns. However, by late 2018, February 2019, and March 2020, many investors lost a total of 20%. This was primarily due to a virus that whipsawed the markets. As a result, the UBS Yield Enhancement Strategy generated substantial fees and commissions, a practice that was frowned upon in the investment industry.

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