UBS Financial was censured, fined $7,500,000.00, and ordered to pay restitution to 165 customers in the amount of $10,978,402.00 after the firm consented to Financial Industry Regulatory Authority (FINRA) findings that it failed to establish and maintain a supervisory system and procedures reasonably designed to ensure suitability of transactions in closed end funds. Acceptance, Waiver, and Consent, No. 2013039142101 (Sept. 15, 2015).
According to the AWC, from January 1, 2009 through July 31, 2013, UBS had failed to monitor the combination of leverage and concentration levels in customer accounts to ensure that certain customers’ transactions were suitable in light of the customers’ risk objectives and profile. The Complaint indicated that UBS PR customer accounts typically were concentrated in closed end funds, causing them to bear increased risk that a single event in the market could cause the fund to lose substantial value. The AWC indicated that the closed end funds were also internally leveraged, which could magnify the losses during a market event. Customers who were of a conservative or moderate risk level had reportedly invested 75% or more of their assets in the closed end fund shares.
The AWC also indicated that the firm had solicited customers to open up lines of credit that were offered by an affiliate and which would be collateralized by the securities accounts of the customers. In the event that the customer’s account value had dropped below a required equity level, the customer would have to immediately deposit additional assets, referred to as a maintenance call, otherwise liquidate securities in order to satisfy the line of credit. According to the AWC, the risk in the UBS PR customers’ cases were that the loans were collateralized by securities which were highly concentrated, and which may have to be liquidated at a time when the securities were valued at low prices, causing losses to be realized.
The AWC further stated that while the firm did disclose risk to customers concerning concentration and leverage, the firm had failed to implement policies and procedures which would be adequately designed to identify the known risks of such, as well as procedures designed to prevent unsuitable transactions when considering the customers’ risk tolerance and objectives. The AWC further noted that the firm’s procedures for financial advisors did not include adequate measures for them to address risks resulting from the combination of using highly concentrated accounts to support the lines of credit.
The AWC indicated that by the middle of 2013, the Puerto Rico bond market suffered a massive decline in market value. At year end 2013, most of the closed end funds and Puerto Rican Municipal Bonds lost 20%-50% of their value. The AWC reported that customers highly concentrated in closed end funds shares saw their values plummet in July of 2013, where many of the customers with lines of credits received maintenance calls. The AWC indicated that some customers had to sell their funds in order to meet maintenance calls at a time when the market for such funds was illiquid – and which in turn caused the customers face drastic losses. 165 customers reportedly with more than 75% of their assets held in highly leveraged closed end funds received maintenance calls, forcing them to realize losses.
The AWC indicated that the firm’s failure to monitor customer accounts was unreasonable considering the state of the Puerto Rico economy, where a large amount of retail customers would maintain high levels of concentration in Puerto Rico assets and use highly concentrated accounts as collateral for cash loans. The AWC noted that the firm knew of these practices, yet failed to adequately monitor leverage and concentration levels to determine whether transactions were suitable in consideration of the increased risks associated with their portfolio. FINRA found that the firm had violated FINRA Rule 2010 and NASD Rule 3010 in this regard.
FINRA, via NASD Rule 3010(a), requires that firms and supervisory personnel establish and maintain a supervisory system that is reasonably designed to achieve compliance with applicable securities laws and regulations. Additionally, Rule 3010(b) requires that firms establish, maintain and enforce written procedures to supervise their business and registered representatives that are reasonably designed to achieve compliance with applicable securities laws.
Guiliano Law Group
If you have been the victim of securities fraud and you have a complaint, you should consult with an attorney. The practice of Nicholas J. Guiliano, Esquire, and The Guiliano Law Group, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.
