The Financial Industry Regulatory Authority ( or "FINRA") reached a settlement with and fined brokerage firm UBS Financial Services concerning UBS’s sale of so-called "100% Principal-Protection" notes issued by the former Lehman Brothers Holdings.
The settlement resulted in UBS agreeing to pay a fine of $2.5 million, and required UBS to pay $8.25 million in restitution for omissions and statements made that effectively misled some investors regarding the "principal protection" feature of 100% Principal-Protection Notes (PPNs) Lehman Brothers Holdings Inc. issued prior to its September 2008 bankruptcy filing. The FINRA settlement also creates a restitution fund of approximately $8 million that is available to limited class of purchasers of the PPNs from UBS (as further explained below).
FINRA determined that from March to June 2008 as the credit crisis worsened, 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, which eventually filed for bankruptcy in September 2008. FINRA also found that some of UBS' financial advisors did not understand the product, including the limitations of the "protection" feature. Consequently, certain financial advisors communicated incorrect information to their customers. FINRA also found that ccertain UBS advertising materials had the effect of misleading customers regarding the characteristics and risks of the PPNs.
Investors should be aware that the restitution provided for in the FINRA settlement is limited to a small subset of investors who purchased the PPNs, including only those who both a) listed their financial risk tolerance as conservative or moderate on UBS account forms; and b) purchased the PPNs during a three and one-half month period between March 2008 and June 2008. Investors who did not list these risk tolerances or who purchased at other times are not eligible for any payment in connection with the settlement. The full terms of the settlement and available restitution are discussed in the FINRA Letter of Acceptance, Waiver & Consent, accessible below.
finra awc.pdf (741.42 kb)