UBS Financial Services, Inc., was censured and fined $250,000.00 by Financial Industry Regulatory Authority (FINRA) after consenting to findings that the firm overcharged customers who purchased mutual funds, and failed to create and preserve supervisory processes to ensure that customers who were eligible for such discounts had received them. Letter of Acceptance, Waiver and Consent, No. 2013038351701 (Aug 15, 2016).
FINRA noted in the AWC that rights of reinstatement are a common mechanism that mutual funds utilize to waive sales charges for customers on the front-end when such customers repurchase Class A shares that were previously sold, subject to specified conditions and time frames. Typically, as FINRA stated in the AWC, the customers are required to repurchase the funds in the same or similar fund family, and make the repurchase within three to six months in order to gain the waiver.
The AWC stated that from September of 2009 through June of 2013, UBS had failed to enable 2,700 of the firm’s customers to receive sales charge waivers that the customers were entitled to receive through rights of reinstatement. UBS reportedly overcharged its customers $277,636.00 by not implementing the sales charge waivers when applicable. Consequently, FINRA found that the firm had violated FINRA Rules 2010 in this regard. However, evoking the fraud net profit rule, whereby firms are expected to profit from their wrongful conduct, FINRA only fined UBS $250,000, resulting in a $27,626 net fraud profit.
FINRA also stated that during the aforementioned time frame, UBS Financial Services had not implemented and maintained supervisory protocols that would ensure that customers eligible to receive sales charge discounts would actually receive them upon a right of reinstatement. Apparently, the firm merely relied upon registered representatives to determine and subsequently effect the discount waivers when applicable.
FINRA additionally claimed that the NAV Reinstatement Report, which the firm utilized to monitor when the representatives had appropriately detected and applied such waivers, was deficient. Apparently, the Report merely monitored trades in mutual funds were a transaction resulting in a purchase or sale had exceeded a $5,000.00 threshold. The AWC stated that the firm failed to apply the Report to twenty of the funds sold by the firm.
FINRA also noted that the firm’s protocols were deficient for failing to review the Report in order to determine whether it was accurate or had functioned properly. As a result, the firm lacked awareness of the fact that its Report had not monitored the mutual funds for the sales charge waivers associated with the rights of reinstatement. FINRA found that the firm’s supervisory failures in this regard were violative of FINRA Rule 2010 and NASD Conduct Rule 3010.
The AWC noted two additional occasions in which UBS had been disciplined for related misconduct. In February of 2008, the firm had been censured and fined $250,000.00 by FINRA after failing to ensure, via the firm’s supervisory systems and procedures, that investors would be able to avoid a sales charge upon a NAV Transfer Program. Letter of Acceptance, Waiver and Consent, No. EAF0401300001 (Feb 2008).
In February of 2004, the firm was censured and fined $2,310,884.00 by FINRA after failing to apply mutual funds breakpoint discounts between 2001 and 2002 that were estimated at $4,600,000.00 for customers who were eligible. Letter of Acceptance, Waiver and Consent, No. CAF040007 (Feb 2004). The AWC noted that the SEC ordered UBS to pay a civil penalty of $2,310,884.00 in a related settlement. Again, using the net fraud profit rule, UBS was able to score net profits of approximately $2.2 million, probably even after they paid their lawyers.
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