Invest with UBS and VXX ETN? The Securities and Exchange Commission recently settled charges against UBS Financial Services Inc. for its failure to supervise relating to sales of iPath S&P 500 VIX Short-Term Futures ETN (“VXX”) in UBS’s Portfolio Management Program (“PMP”). VXX is a volatility linked exchange-traded product.
From January 2016 to January 2018, certain financial advisors in UBS’s discretionary Portfolio Management Program purchased and held VXX for their advisory clients for durations that were inconsistent with the purpose of the product, as described in its offering documents, and as described to UBS in a meeting with VXX representatives.
Approximately 1,882 accounts held VXX for extended period of time, including hundreds of accounts that held the product for over a year. The SEC Order states that the accounts lost “a substantial percentage—in many instances over 75% —of the value of their VXX investments.”
What is UBS’s Portfolio Management Program (“PMP”)?
The Portfolio Management Program (PMP) is UBS’s managed discretionary account advisory program. Financial advisors in UBS’s Portfolio Management Program who had more than five years of experience were allowed to use their discretion to invest client assets in VXX.
UBS and VXX ETN – What is iPath S&P 500 VIX Short-Term Futures ETN (“VXX”)?
According to the SEC Order, VXX is a volatility-linked, complex, exchange-traded note that offers exposure to futures contracts of specified maturities on the CBOE volatility index (“VIX”). The VIX attempts to track the expected volatility of the S&P 500, not the price level of the S&P 500 itself. Futures contracts on the VIX allow investors to invest in forward volatility based on their view of the near-future direction of the VIX.
Other details about VXX include:
- The performance of VXX is not linked directly to the VIX but to a separate index that tracks the price of futures contracts on the VIX, the S&P 500 VIX Short-Term Futures Index Total Return (TR) (“Futures Index”). The performance of the Futures Index is based on a hypothetical rolling portfolio of one-month and two-month futures contracts to target a constant weighted average of one month maturity.
- The SEC Order goes onto state that the Futures Index does not purport to track or measure implied volatility in the medium or long term, as its name—“Short-Term”—implies. On a daily basis, the Futures Index hypothetically sells futures contracts closest to expiration and buys the next month out to maintain a constant exposure.
- When the prices are lower in the distant delivery month than in the nearer delivery month, the futures curve is in “backwardation,” and VXX benefits from positive “roll yield.” However, when the price of the distant delivery month is higher, the futures curve is in “contango,” resulting in “negative roll yield.”
UBS Warned About VXX
According to the SEC Order, VXX representatives warned UBS that it was inappropriate to hold VXX for extended periods. VXX’s offering document stated that the product was more likely to decline in value when held over a longer period.
While UBS prohibited brokerage representatives from soliciting sales of the product and placed other restrictions on sales of the product to brokerage customers, it did not place similar restrictions on certain financial advisers’ use of the product in discretionary managed client accounts.
The SEC Order also stated that UBS adopted a concentration limit on volatility-linked ETPs, but the firm failed to implement a system for monitoring and enforcing that limit for five years.
Certain UBS Portfolio Management Program Financial Advisors Held VXX for Extended Periods in Discretionary Managed Accounts
From January 2016 to January 2018, certain PMP financial advisors bought VXX for advisory clients and held it in discretionary managed accounts, including retirement accounts. The SEC Order states that UBS did not restrict these financial advisors’ use of VXX to certain strategies or by client risk profile, net worth, or income.
Approximately 1,882 PMP accounts held VXX for extended periods, including hundreds of accounts that held VXX for over a year. These accounts lost a substantial percentage. Specifically, the SEC Order notes that, in many instances, over 75% of the value of their VXX investments were lost.
Also, certain financial advisors in UBS’s PMP had a “flawed understanding” of the appropriate use of VXX and the associated risks. As a result, they could not make a reasonable determination as to whether VXX was a suitable investment for their clients.
UBS and VXX ETN – UBS Settles Charges with SEC
UBS agreed to a cease-and-desist order, a censure, payment of a civil penalty of $8 million, and disgorgement and prejudgment interest of $112,274.
Investment Losses with VXX in UBS’s Portfolio Management Program – Contact Us
Former and current customers of UBS’s Portfolio Management Program who held VXX, and those who may have information relating to the manner in which the firm handled their accounts, are encouraged to contact Lawrence L. Klayman, Esq., at (561) 542-5131, and download our Special Investor Report.
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