FINRA Hits UBS With Nearly $3.5M Penalty for Unsuitable Short-Term Trading of Syndicate Preferred Stocks
The Financial Industry Regulatory Authority has acted against global brokerage firm and investment adviser UBS Financial Services Inc., or UBS-FS. According to FINRA, UBS-FS failed to establish and maintain a supervisory system reasonably designed to assess whether its registered representatives recommended unsuitable short-term trades of syndicate preferred stocks to retail customers.
From January 2017 to at least December 2018, FINRA said at least 22 UBS-FS representatives or representative teams recommended that UBS-FS’s retail customers purchase syndicate preferred stocks and then sell the positions within 180 days, causing the customers to sustain losses on these transactions while the representatives collected concessions and commissions.
Syndicate preferred stocks are income-generating securities that typically offer more consistent income payments than common stock and higher payments than many bonds. They are generally purchased for their income features and held long term.
FINRA said that trading in syndicate preferred stock may be subject to potential abuse when representatives make recommendations to customers to purchase the security, collect the sales concession, and then recommend a short-term sale of the security. This practice is particularly concerning if the representative then solicits the customer to purchase a different preferred stock, again receiving a front-end sales concession.
FINRA reported that during the relevant period, firm-wide, at least 22 UBS-FS representatives or representative teams recommended 1,986 syndicate preferred stock purchases that were then sold with a holding period of 180 days or less where there was a realized loss on the sale, even after including income earned on the position. For these 1,986 positions, UBS-FS earned $2,645,537 in selling concessions from the syndicate purchases, collected from the issuer, and at least $343,914 in sales commissions from the subsequent sales, collected from the customers.
Per FINRA, UBS violated Rule 3110, which requires that member firms establish and maintain a supervisory system to monitor transmittals of customer funds, and Rule 2010, which requires member firms to uphold high standards of commercial honor.
FINRA did say that by January 2023, UBS-FS implemented enhanced written procedures and guidance and revised its trade review system for supervisory review of short-term trades of syndicate preferred stocks. Nonetheless, FINRA censured and fined the company $500,000, plus $343,914.66 in restitution and $2,645,537 in disgorgement.
Earlier this year, UBS-FS was fined $850,000 for similar supervisory failures related to adviser misconduct.
Headquartered in Weehawken, N.J., UBS has more than 11,000 registered representatives at more than 800 branch locations. UBS is an international, full-service brokerage firm.
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