UBS Financial Services Inc. ("UBS") has reached a voluntary settlement with New Jersey, agreeing to pay $49,500,000 and implement significant reforms to resolve allegations that it failed to reasonably supervise financial advisers who timed mutual funds to the detriment of shareholders, Attorney General Peter C. Harvey announced.
Under the agreement, UBS will make a settlement payment to New Jersey of $24,750,000, which represents the largest sum ever collected by the state in a securities matter, surpassing an $18 million 2004 settlement with Allianz Dresdner Asset Management of America LP, another market timing case.
The firm will pay an additional $24,750,000 going to the New York Stock Exchange, which cooperated with New Jersey in the investigation.
The agreement settles allegations by the New Jersey Bureau of Securities that from September 1999 until at least December 2002, UBS failed to reasonably supervise certain brokers who engaged in deceptive market timing activities that benefitted their customers but harmed mutual funds and their long term shareholders.
"Our investigation revealed that UBS Financial Services failed to reasonably supervise certain brokers whose extensive market timing activities violated the policies of mutual funds and harmed smaller investors in the funds," said Attorney General Harvey.
"Certain of these same brokers have been the subject of prior enforcement action by our Office. UBS deserves credit for entering into this settlement, under which it will continue to implement reforms to enhance supervision of its brokers and to ensure compliance with its own policies against market timing."
"This settlement follows an extensive investigation by the New Jersey Bureau of Securities in partnership with the New York Stock Exchange," said Franklin L. Widmann, Chief of the Bureau of Securities. "UBS has cooperated with our investigation and has taken steps to better supervise its financial advisers. Through investigations such as this, we are achieving positive reforms within the industry."
The Market Timing Conduct
Between September 1999 and December 2002, UBS brokers allegedly completed more than 300,000 market timing transactions involving mutual funds and the mutual fund sub accounts of variable annuities and other insurance products. The alleged market timing activity involved brokers in several UBS branch offices, including the Paramus, N.J., office.
Market timing involves making frequent trades into and out of mutual funds to take advantage of market fluctuations. Most funds have policies against market timing, which harms long term investors by (1) allowing the market timer to siphon off short term profits and dilute the value of the fund, (2) increasing transactional costs of the fund, and (3) making the fund more difficult to manage.
UBS subsequently conducted its own internal investigation into market timing activities by brokers at the firm and disciplined certain brokers and their supervisors. UBS also put into place a number of remedial measures to enhance supervision of brokers and to ensure that similar activity will not recur. UBS, in entering this settlement, neither admitted nor denied the Bureaus allegations.
