UBS Inadequate Supervision of PR Bond Sales leads to $34 Million Fine

UBS has settled charges brought by the SEC and FINRA concerning their sales of Puerto Rico mutual funds to Puerto Rico investors.

This wasn’t exactly what we had in mind when we started writing about potential issues in the bond market earlier this year and our expectation that we would see more bond whistleblowers, but it does validate the basic idea that the growth in mutual funds and ETFs has set the stage for an increase in wrongdoing in this area.

The FINRA action led to a fine of $7.5 million and restitution of $11 million for the failure to monitor transactions to ensure they were suitable to the risk objectives and profiles of their customers. The customers at issue took large losses after they were sold an over concentration of Puerto Rican closed-end fund shares.

The SEC enforcement action related to the Swiss Bank’s inadequate supervision of two employees that recommended investors place borrowed money in mutual funds in Puerto Rico. One of the employees inappropriately helped investors borrow from UBS credit lines in order to invest in the UBS-run funds. The other misled customers about the safety and risks of their investments.

Coincidentally, investment advisers were in focus yesterday at a securities conference hosted by the SEC for the 75th Anniversary of Investment Company Act of 1940 (’40 Act) and the Investment Advisers Act of 1940. The ’40 Act and the Advisers Act were the last of the series of legislation designed to protect investors following the Depression.

Among the topics that were discussed at the conference among industry players were whether ETFs should be separately regulated from mutual funds.

Former SEC Chairs Harvey Pitt and Elisse Walter also spoke about the increasingly long time between SEC examinations of small and medium firm advisers. The average time between exams has increased from five to eleven years, and t

Although I wasn’t able to listen to the conference which was broadcast live online (thanks SEC!), I imagine there were also discussions about the implications of potential changes to the fiduciary standards among those not currently required to put customer interests before their own concerns.

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