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Half of the penalty shall be payable to the State of New Jersey. Of the remaining $24.75 million, $18 million shall be placed in a Distribution Fund to compensate injured customers of UBS who, during the relevant period, invested long-term in the same mutual funds that were the subject of market-timing; a $5.75 million penalty will be paid to the NYSE; and credit was given for $1 million being separately paid to the State of Connecticut as part payment in a matter relating to improper market-timing. Any remaining amount in the Distribution Fund after compensating UBS customers will then be distributed to other investors who were not UBS customers but who invested in these affected mutual funds. Any unused portion will revert to NYSE Regulation after three years.
“When a brokerage firm permits a hedge fund or any other market participant to trade deceptively and gain an unfair advantage over other investors, it has violated the trust that forms the foundation of our capital markets,” said Richard G. Ketchum, chief regulatory officer, New York Stock Exchange. “UBS’s failure to have adequate controls in place led to this unfortunate occurrence.”
“A broker-dealer must respond swiftly and effectively when misconduct is detected that places any of its customers at risk,” said Susan L. Merrill, chief of enforcement, NYSE Regulation. “Our order is focused upon getting money back into the hands of injured investors.”
Beginning January 2000 and continuing through December 2002, brokers in at least seven UBS branch offices engaged in deceptive market-timing to benefit their customers, typically hedge funds, to the detriment of the affected mutual funds and their non-market-timing shareholders. The brokers used deceptive trading practices to conceal their identities, and those of their customers, to enable them to trade in mutual funds that sought to limit or curtail their market-timing.
These practices included the use of multiple branch wire code prefixes, multiple broker identification numbers, multiple customer accounts, and the brokers’ use of “under the radar” trading to avoid notice by mutual funds. Typically, mutual funds screened for market-timing trades only above a designated dollar amount. The practice of “under the radar” trading refers to splitting one trade into numerous smaller ones to avoid detection by mutual funds.
Market-timing activity by the brokers on behalf of their clients sparked issues with several mutual fund companies who not only complained about the frequency and volume of trading, but also identified deceptive trading practices by certain brokers and/or clients. These notices and complaints generally were sent to the Firm’s Operations area, individual brokers and branch managers, and in a few instances, to an employee in the Compliance Department. Upon receiving the notices the brokers continued to engage in market-timing activities for their respective clients in the funds, often using deceptive practices to avoid further fund detection.
UBS did not have any policies or procedures in place that would have required individuals in Operations or other departments receiving such notices to alert the Compliance Department or escalate them to appropriate supervisors. Throughout the relevant period, the Firm received more than 1,000 such notices from mutual fund companies that identified the brokers’ conduct and asked the Firm to take steps to curtail either the volume of trading by the brokers or their improper trading practices.
In addition, in April 2001, the Firm decided to conduct a review of its market-timing business and instructed its branch managers to identify any market-timing accounts in their branches. From April through October 2001, the Firm gathered information from branches regarding market-timing accounts and, in some instances, became aware that certain brokers were using deceptive trading practices to avoid detection by mutual funds that sought to stop, limit or curtail their market-timing. Nevertheless, the Firm did not put in place reasonable procedures to ensure that it complied with these specific requests from the funds. As a result, the market-timing business continued with the Firm’s operational support up through the end of 2001.
Furthermore, in December 2001, UBS issued a memorandum to all brokers and branch managers announcing that the Firm was no longer going to support mutual fund market-timing, and that all such accounts must be removed from the Firm by February 2002. The Firm also sent a similar memorandum to certain mutual fund companies, announcing the end of their operational support for market-timing accounts. Nonetheless, at the same time, the Firm permitted one of its brokers and his market-timing clients to remain at the Firm through December 2002, based on that broker’s representations that his clients would incur large contingent deferred sales charges if they were forced to liquidate their existing fund positions. Such permission was granted by the Firm without verifying the broker’s representations, scrutinizing the relevant accounts and without placing additional supervisory controls over that broker’s activities. Consequently, this broker was able to place at least 58,000 market-timing transactions on behalf of his customers, notwithstanding the December 2001 announcements.
UBS also failed to maintain required books and records, namely, of trades placed by the brokers in the mutual fund sub-accounts of variable annuities and intra-firm e-mail prior to August 2001. The failure to maintain both groups of records disadvantaged both the Firm’s ability to supervise the activity, as well as the subsequent regulatory investigation and understanding of what was occurring at the Firm concerning market-timing.
UBS agreed to retain an outside law firm to review the Firm’s procedures relating to relating to supervision and the maintenance of books and records, and to have that report submitted to NYSE Regulation and the Firm’s Board of Directors. UBS consented to the sanction.
NYSE Regulation worked cooperatively in this matter with the New Jersey Office of Attorney General and Bureau of Securities, which is announcing its joint settlement with UBS today.
In settling these charges brought by NYSE Regulation, UBS Financial Services, Inc. neither admitted nor denied the charges.
See HPD 06-005
About NYSE Regulation
On December 17, 2003, the SEC approved a new governance structure for the NYSE. Under the new design, the NYSE Board of Directors is comprised solely of independent directors, except for the chief executive officer, who have no affiliation with any regulated member firm. A new position of chief regulatory officer was created and reports directly to the board of directors through a new Regulatory Oversight Committee. As a result, NYSE Regulation is insulated from potential influence from NYSE members and member firms, operates separately from the business side and is independent in its decision-making.
NYSE Regulation plays a critical role in monitoring and regulating the activities of its members, member firms and listed companies, as well as enforcing compliance with NYSE rules and federal securities laws. Nearly 400 of the largest securities firms in America are members of the New York Stock Exchange. These firms service 98 million customer accounts, or 84 percent of the total public customer accounts handled by broker-dealers, with total assets of over $4 trillion. They operate from 20,000 branch offices around the world and employ 144,000 registered personnel.
Nearly 700 employees, or more than 40 percent of the Exchange’s staff, work for NYSE Regulation, which consists of four divisions: Market Surveillance, Member Firm Regulation, Enforcement and Listed Company Compliance, as well as a Risk Assessment Unit and Dispute Resolution/Arbitration.
