FINRA Fines UBS $2.5 Million Plus Restitution For Failed "Principal Protection" Notes


FINRA has determined that UBS advisors continued to sell "principal protected" Lehman Brothers debt until at least June 2008, well within the time period when the doomed investment bank was demonstrating its terminal weakness.


Furthermore, the advisors failed to educate buyers of the notes in the specific circumstances under which Lehman could indeed default on these unsecured instruments, even though under ordinary circumstances the principal invested would be guaranteed.


Principal-protected notes are somewhat complex investments, but can readily be marketed as being "almost risk-free under most scenarios" or some similar description. 


That's why FINRA is making UBS pay back $8.25 million to clients as well as a $2.5 million punitive fine.


As we all learned during the credit crunch, "almost" risk-free is very different from risk-free, which arguably doesn't even exist.


Even the various classes of money market funds -- previously promoted as practically equivalent, only with different yields -- proved that they're not all created equal. Reserve Primary was technically a "prime" rated fund, but failed anyway. It wasn't sold as risk-free, but its demise got large and small investors thinking about the fine distinctions in risk.


Normally, Lehman Brothers would have made good on its notes no matter what happened to the interest rate environment -- if the firm had survived. As it is, advisors all need to consider the black swan event or "unthinkable" scenario when selling what would've once looked like a sure thing.

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