The Financial Industry Regulatory Authority announced that it has fined UBS Financial Securities $850,000 for the brokerage’s failure to monitor the transfer of customer funds to third parties and respond appropriately to any red flags indicating potential private securities transactions. The penalty stems from UBS’s failure to detect that one of its brokers sold securities to his clients that were offered by a third party, an entity formed by the broker’s college friend.
According to FINRA’s order, the broker “facilitated at least 30 UBS customers’ investments in private securities transactions totaling over $7.2 million.” From 1997 to 2021, the UBS representative sold to at least 30 of his UBS customers a “fixed annuit” product offered by an entity formed by the rep’s college friend and business acquaintance. FINRA claims that although the UBS customers believed they were investing in a “fixed annuity” product, they were actually investing in riskier private securities.
FINRA is holding UBS responsible for the broker’s fraudulent practices on account for the fact that its supervisory systems were not reasonably designed to achieve compliance with the firm’s obligation to monitor transmittals of customer funds to third parties. Although the firm automatically flagged for heightened review wires that met certain criteria (e.g., the wire was the customer’s first domestic wire in six months), its automated 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.
UBS Failed to Investigate the Private Transactions
FINRA also notes that UBS should have systems better designed to flag private securities transactions. For at least 17 of the wire transfers to the third party, the reason the customers provided for the wire transfer request was “investment.” UBS flagged the wires for additional review and approval but did not investigate why the representative’s customers were wiring money to the same external, non-UBS entity for an “investment.”
UBS also failed to reasonably investigate several instances from September 2010 to July 2021 in which at least two customers wired money to the third party within the same 30-day period. As an example, in March 2021, two unrelated customers wired a total of $47,000 from their UBS accounts to the third-party entity within eight days of one another. Although UBS flagged both wires for additional review and approval, the firm did not investigate why two of the broker’s customers were wiring money to the same external party.
As a result of UBS’s failures to monitor its customers’ wire transfers, the firms violated NASD Rules 3010 and 3012 and FINRA Rules 3110 and 2010. When the scheme was uncovered, it was discovered that the customers lost most of their funds and UBS repaid the customers more than $17 million in restitution. 
Jacob Horowitz is a contributing editor at Compliance Chief 360°