UBS Financial Services Inc submitted a letter of acceptance, waiver, and consent to FINRA for the purpose of proposing a settlement of alleged rule violations over supervisory failings, agreeing to a censure and an $850,000 fine.

From approximately 1997 to 2021, a registered representative of UBS participated in private securities transactions by selling to at least 30 of his UBS customers a “fixed annuity” product offered by Company A – an entity formed by the representative’s college friend and business acquaintance. Those transactions, sold outside of the scope of his employment with the firm, were not approved by or offered by UBS. Indeed, UBS’s policies prohibit registered representatives from recommending, referring, soliciting or directing clients to purchase any product not yet approved by UBS.

Beginning in at least September 2010, 10 of the representative’s customers at UBS invested in the “fixed annuities” by wiring approximately $1.8m, through 64 wire transfers, directly from their UBS accounts to Company A’s bank accounts. Collectively, the representative’s UBS customers invested over $7.2m in Company A.

UBS did not discover the representative’s misconduct until the fall of 2021 when one of the representative’s former UBS customers sought to withdraw her entire investment from Company A. Those of the representative’s customers who invested in Company A lost most, if not the entirety, of their investments.

After discovering the representative’s misconduct, UBS repaid the customers who had invested in Company A their principal, plus the amount of appreciation Company A listed on the customers’ statements, totaling more than $17m in restitution.

Broken supervisory system

FINRA said that UBS lacked a reasonable supervisory system to review transmittals of customer funds to third parties by wire or check.

During this period, the firm automatically flagged for heightened review wires that met certain criteria (for example, the wire was the customer’s first domestic wire in six months). But the firm’s automated surveillance system did not detect and monitor for instances in which multiple, unrelated customers transferred funds from their UBS accounts by check or wire to the same external party (Many-to-One Transfers). Nor did any other aspect of the firm’s system monitor for Many-to-One Transfers, even though these transfers can be an indicator of fraud, conversion, private securities transactions, or undisclosed outside business activities, FINRA noted.

Policies and procedures must be designed so the organization can review and monitor the attendant instructions involved with a withdrawal of assets from customer accounts.

UBS also failed to reasonably respond to red flags that its representative was participating in private securities transactions involving Company A, the agency said.

Indeed, even when the representative’s sales assistant received emails detailing these transactions and was tasked with giving them to the rep’s supervisor, that supervisor failed to reasonably investigate Company A or the rep’s involvement with it. In one example, a request to waive a wire transfer fee was approved without any follow-up with the rep or the customer before approving it.

In at least 17 wire transfers to Company A, the only reason the customers gave for the wire transfer request was “investment,” which was not investigated, despite the transfer to the same external, non-UBS entity.

Sanctions

UBS was charged with violating FINRA Rule 3110 (supervision over the activities of associated persons) 3120 (testing/verifying the member’s supervisory procedures are reasonably designed with respect to its activities) and 2010 (standards of commercial honor and ethics).

The censure and fine were imposed, as noted above.

Implications

In a regulatory notice issued in 2009, FINRA reminded member firms that “[a]s part of their duty to safeguard customer assets and to meet their supervisory obligations, FINRA firms must have and enforce policies and procedures governing the withdrawal or transmittal of funds or other assets from customer accounts.”

Indeed, policies and procedures must be reasonably designed so the organization can review and monitor all of the attendant instructions involved with the transmission or withdrawal of assets from customer accounts.

To do this, FINRA reminds firms in such things as its FAQs and recent enforcement decisions that they must do the following:

• refrain from supervisors overseeing their own work;
• ensure there is a method to document customer confirmation, notification or follow-up for transmittals and evidencing the completed transaction;
• conduct risk-based methodologies and sampling to test and verify that supervisory policies and procedures are working, being followed and trained on; and
• promptly amend or create additional supervisory procedures where the need is identified by such testing and verification.

To be sure, this case also presents some considerations in the area of surveilling outside business activities, too, which were not addressed but should be considered as an important area of registered rep supervision. Failing to collect such information and monitor for any related misconduct can lead to other lapses of regulatory obligations, as it did here.