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Home > Blog > FINRA Fines UBS Over Lehman-Issued 100% Principal-Protected Notes

FINRA Fines UBS Over Lehman-Issued 100% Principal-Protected Notes

Principal-Protected Notes (PPNs) – and the misrepresentation of them – are back in the news. The Financial Industry Regulatory Authority (FINRA) has fined UBS Financial Services $2.5 million over PPNs, requiring the brokerage firm to pay $8.25 million in restitution for omissions and statements made to investors about the products.

According to FINRA, UBS’s statements about the products effectively misled some investors about the “principal protection” feature of 100% Principal-Protection Notes issued by Lehman Brothers Holdings prior to its September 2008 bankruptcy filing.

Principal-protected notes are considered fixed-income security structured products with a bond and an option component that promise a minimum return equal to an investor’s initial investment.

According to FINRA, as the credit crisis worsened during March to June 2008, UBS advertised – and some UBS financial advisors described – the structured notes as principal-protected investments while failing to emphasize they were actually unsecured obligations of Lehman Brothers.

In making its decision against UBS, FINRA found that the firm:

  • Failed to adequately disclose to some investors that the principal-protection feature of the Lehman-issued PPNs was subject to the credit risks of Lehman Brothers Holdings;
  • Did not properly advise UBS financial advisors of the potential effect of the widening of credit default swap spreads on Lehman’s financial strength or provide them with proper guidance on using that information with clients;
  • Failed to establish an adequate supervisory system for the sale of Lehman-issued PPNs;
  • Failed to provide sufficient training and written supervisory policies and procedures;
  • Did not adequately analyze the suitability of sales of the Lehman-issued PPNs to certain UBS customers; and
  • Created and used advertising materials that essentially misled some customers about specific characteristics of PPNs.

UBS neither admitted nor denied the charges levied by FINRA, but consented to the entry of the findings.

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