UBS Financial Services Inc. of Puerto Rico, a unit of UBS Wealth Management Americas, has agreed to pay $5.2 million to settle allegations by Puerto Rico regulators that the firm's brokers may have improperly placed clients into its proprietary closed-end bond funds.
Approximately $1.7 million will go to reimburse 34 “mostly senior, low-net-worth” clients who were heavily concentrated in the closed-end funds, which plummeted in value last year, according to an Oct. 9 announcement from the Office of the Commissioner of Financial Institutions of Puerto Rico.
The other $3.5 will go to support the commission's investor education fund, according to the release, which was
reported earlier by Reuters.
From 2011 to 2013, certain UBS brokers in Puerto Rico “may have permitted or recommended” that clients take out loans, using their portfolio as collateral, through UBS Bank USA in order to purchase additional shares of the funds, in violation of firm policies and potentially contrary to those clients' risk tolerance.
“Such practice also may have been potentially unsuitable based on the customers' financial objectives, risk tolerance and needs, and/or certain purchases may have been induced by misrepresentations or omissions of material facts,” the settlement stated.
UBS also agreed as part of the settlement to place six of its brokers involved under “enhanced supervision” for six months to a year. The firm has about 130 advisers in Puerto Rico.
The OCIF also said it found that in some instances, brokers may have made transactions in their clients' accounts without obtaining prior authorization, and there were also problems with recordkeeping for the accounts, according to the settlement.
The issues were uncovered as part of a routine examination beginning October 2013 and concluding June 2014, the OCIF said.
UBS agreed to the settlement without admitting or denying the findings, according to the announcement.
A spokesman for the firm, Gregg Rosenberg, said in an e-mailed statement that the firm was “pleased to have resolved this matter,” and looks forward to “building deeper relationships in within the community” as it continues to serve clients in Puerto Rico.
UBS also agreed to revise policies and procedures to better supervise for possible violations, according to the settlement.
The $5.2 million settlement is likely only a fraction of the overall losses as the firm disclosed in second-quarter earnings reports that it was facing more than $600 million in claims from investors in the closed-end bond funds.
There were 14 such proprietary closed-end bond funds, all of which suffered severe declines last year. One fund, the Puerto Rico Fixed Income Fund Inc. reported a decline of as much as 31% between August and September as anxiety in the bond market took a sharp toll on Puerto Rico bonds. That fund's net asset value remains depressed at $3.65 per share, compared to $3.74 on Sept. 25 last year, according to filings.
As part of the settlement, UBS will also look to determine if there are more clients outside of the 34 named in this settlement who meet the criteria of “senior, low-net-worth investors with a conservative risk profile” who had a potentially significant level of liquid assets invested in UBS' closed-end Puerto Rico funds and may provide additional restitution within six months.
Those who do not meet the profile will have to file their own complaints separately, the OCIF said in a separate release published to its website.
In that most recent update, which was not dated, the OCIF said that after the initial announcement, “many UBS customers have called our offices claiming to have suffered losses and meeting the same criteria as those compensated under the agreement.”
