UBS and other well-known investment firms are currently making the news for marketing Yield Enhancement Strategy (YES) to its clients as “safe” and “conservative .” While YES was marketed as a safe way for investors to enhance their income stream, YES was anything but safe. Brokers that recommended YES strategies to clients without proper due diligence and disclosure, or that recommended the strategy to conservative income oriented clients, likely engaged in broker misconduct, which could make them liable to those clients. Rather than enhance yield, as promised, the strategy actually resulted in large losses.
YES, designed to earn investors more yield during a time when the markets were relatively stable and interests rates low, involved investing in a series of four options for the S&P 500 Index (SPX). This strategy is also known as an “Iron Condor” Options scheme, and involves an options strategy marketed by some brokers as a low-risk way for investors to enhance the yield from an investment portfolio. An Iron Condor strategy consists of selling one call spread and one put spread, each with the same expiration day, on the same underlying asset. Used properly, the iron condor is designed to have a high probability of earning a small profit, provided that the underlying security has low volatility.
While YES wasn’t going to make investors a huge yield if successful, its intent to hedge risk and earn small returns was not without risk. Not only is risk involved, but YES is extremely complicated, making it difficult for most investors to understand. Because of this inherent complexity, it is possible, even likely, that brokers and brokerage firms recommending the strategy failed to adequately disclose the risks involved, resulting in a lack of understanding on the client’s part. A broker has a duty to disclose all risks associated with an investment and firms must implement adequate risk controls and compliance systems to monitor a broker’s recommendation to engage in YES strategies. Failure to do so constitutes a breach of the suitability rules, is negligent, and also a breach of fiduciary duty.