UBS agreed to compensate 34 Puerto Rico-based investors for their losses in investments in their municipal bond closed ended funds.
UBS Financial Services of Puerto Rico agreed to the restitution following an investigation by the Puerto Rico Office of the Commissioner of Financial Institutions, the office said in a statement Thursday. UBS agreed to $1.681 million restitution for the 34 clients and to provide a $3.5 million contribution to the Securities Trading, Investor Education, and Investigation Fund.
In October 2013 the office initiated an inquiry into UBS practices with the closed ended funds.
The funds in question are for Puerto Rico residents, because they are structured to produce income exempt from Puerto Rico taxes. A Puerto Rico law requires that at least 67% of a fund must consist of Puerto Rico munis for the fund to be exempt from Puerto Rico taxes.
Declining prices in the late summer and the fall of 2013 triggered call provisions of some of the closed-ended funds, affecting investors with leveraged positions. Investors were asked to pony up additional money. Some investors were unable to do so and lost large portions of their investments.
The office chose a group of investors for this settlement who were senior aged, low-net worth, had a substantial portion of their assets in the closed-ended funds, and had declared their risk-profile to be conservative with UBS, said UBS head of media relations Karina Byrne.
After looking at the experience of these clients, the office became aware "that UBS may have permitted or recommended such clients the use of 'non-purpose' loans for the purchase of additional Puerto Rico Closed-End Funds, and ineligible activity for 'non-purpose' loans," the office reported in a statement. "Additionally, [the office] observed apparent irregularities in the management of some of these clients' accounts and lack of adequate record keeping and diligent supervision by UBS of its agents."
The agreement calls for enhanced supervision for six months of six UBS professionals who may have engaged in objectionable practices. This is automatically extendable for an additional six months, unless the office otherwise approves.
Within six months UBS is to conduct a review of customer accounts where senior, low net worth investors with a conservative risk profile had a potentially significant portion of their money invested in closed ended funds to determine if any additional action or restitution is required. UBS also agreed to review its procedures to assure compliance with regulatory rule, in particular with regard to "non-purpose" loans.
"This agreement is fair to all concerned," said office commissioner Rafael Blanco. "On one hand we avoid a costly and protracted administrative/judicial process and affected clients identified in the examination receive immediate restitution for their losses. On the other hand [the office] meets its ministerial obligation by ensuring that UBS adopts measures that will avoid recurrence of cited findings."
The UBS Puerto Rico unit "is pleased to have resolved this matter," Byrne said. "We look forward to continuing to serve our clients in Puerto Rico and building deeper relationships with the community."
Several lawsuits have been filed against UBS with regard to the closed ended funds and advise that its professionals gave. In addition many clients have filed cases with the Financial Industry Regulatory Authority for arbitration. FINRA has gathered 800 arbitrators to hear the cases.
The office is continuing to look at the cases of other senior, low-net worth clients with the possibility of negotiating a similar settlement for them, Byrne said.
Robert Slavin is one of Bond Buyer's Northeast reporters.
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