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In August 2019, UBS Financial Services removed the Yield Enhancement Strategy (YES) program from its website, a sign that the program is no longer issued by the firm.
The YES strategy is an options strategy that was marketed by UBS, as well as many other large brokerage firms, as a reportedly safe method to generate supplemental portfolio income.
The strategy involved the use of an “Iron Condor” options strategy, which involves selling both near-the money and out-of-the money put and call options against the S&P 500 index, NASDAQ and other primary indices.
The S&P 500 is a stock index based on the 500 largest companies whose stock is listed for trading on the NYSE or NASDAQ.
The premium value of an option is determined by (1) time (i.e., maturity) and the (2) strike price. If the option has a shorter maturity, there is theoretically less time for an investor to navigate short-term volatility, leading to more pronounced swings in the market value of the option.
Conversely, if the option has a longer maturity and the options are further out-of-the-money, short-term volatility may not cause significant changes in the market value of the option.
In a stabilized market environment, some or all of the options will expire and the investor collects the premiums. Conversely, in a volatile market, the premiums associated with the options positions will spike, creating margin calls, closure of options positions at a loss and/or the exercise of the underlying options.
The Issues With YES
The problems with YES began in 2018, with violent fluctuations in the S&P 500, which reached highs of 2,929 and a low of 2,350. The most volatile period was between October and December 2018, during which time the market declined 20% — followed by a rebound of 12% through January 2019.
These violent swings caused the premiums of both the put and call side of the Iron Condor strategy to spike, leading to losses on both sides of the trade.
As a result, investment clients with many of the large brokerage firms, including Merrill Lynch, Credit Suisse, Morgan Stanley, and UBS, among others, are now alleging their brokers recommended unsuitable YES investments, resulting in devastating losses.
Unfortunately, many financial advisors did not adequately disclose the risks associated with these types of high-risk investments. Chief investment strategists say that the YES strategy should only be purchased by investors with an aggressive risk tolerance due to the high-risk nature if the market moves against the position.
In fact, many financial advisors marketed the YES investment strategy as an options strategy that was promoted as a safe way to provide investors with additional income. The YES strategy required investors to commit to a certain minimum amount of investment in their portfolio, which typically was in excess of $1 million.
Reports say that some financial advisors misrepresented and recommended the YES strategy to their highest net worth customers, and described it as a safe and efficient way to enhance yield from conservative portfolios.
It is reported that investors may have seen losses by as much as 20% of capital invested in the YES strategy in late 2018 and throughout the first few months of 2019. However, it is alleged that some brokers misinformed their clients that their risk exposure would only be 1-2%.
Pursuant to FINRA Rules, member firms are responsible for supervising a broker’s activities during the time the broker is registered with the firm. Therefore, Merrill Lynch, Credit Suisse, Morgan Stanley, and UBS and other brokerage firms may be liable for investment or other losses suffered by its customers.
UBS, as well as other brokerage firms who participated in marketing YES option strategies, are now under investigation.
The investigation focuses on a number of important issues, including (1) whether the UBS Yield Enhancement Strategy fully and adequately disclosed to investors important and major risks associated with the YES program; (2) whether UBS investors were improperly invested in the YES program, which may have been unsuitable to their investment profile; (3) whether some investors’ portfolios may have been overly-concentrated in the YES program; and (4) whether the actual trading strategy was consistent with the advertised strategy in the YES presentations and brochures.
Recent News Related to UBS
- Yield Enhancement Strategies (YES): What They are and Why They Fail (8/30/2019)
- The UBS Yield Enhancement Strategy (YES) Was Touted as Safe — But Many Investors Suffered Significant Losses (7/30/2019)
- Investors are Filing Lawsuits after Suffering Significant Losses With the UBS YES Strategy (7/30/2019)
- UBS Yield Enhancement Strategy Losses – Investor Information Center (5/30/2019)
- Top Broker Fired by UBS Financial Services for Violating Firm Policies (5/2/2019)
- Broker Investigation: David Fagenson (11/28/2018)
- Broker Alex Herrera Barred by FINRA, Accused of Stealing Funds (11/16/2018)
- UBS Sues Fired Broker David Fagenson for Not Paying FINRA Arbitration Award (10/23/2018)
- Broker Investigation: John Halsey Buck III (10/17/2018)
- Broker Investigation: Kevin Smith (10/10/2018)
Speak to a Securities Lawyer Today
If brokerage firms sold unsuitable, risky private placements to investors, they could potentially be held liable for any resulting financial losses. At Sonn Law Group, we have extensive experience representing investors in securities lawsuits and FINRA arbitration cases. If you sustained large investment losses, you may be eligible to recover monetary damages. For a free consultation, please contact our law office today.
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