Stock Broker Fraud and Misrepresentation Mutual Fund FINRA Arbitration and Litigation Attorney, Russell L. Forkey, Esq.

January, 2012:

SEC Charges UBS Global Asset Management for Pricing Violations in Mutual Fund Portfolios

The Securities and Exchange Commission recently charged an investment advisory arm of UBS with failing to properly price securities in three mutual funds that it managed, resulting in a misstatement to investors of the net asset values (NAVs) of those funds. The misconduct was revealed during the course of an SEC examination, minimizing investor harm.

The SEC’s Enforcement Division began investigating UBS Global Asset Management (UBSGAM) following a referral from SEC examiners who conducted a routine exam of the firm, which is an SEC-registered investment adviser. The SEC’s investigation further determined that during a two-week period, UBSGAM did not follow the mutual funds’ fair valuation procedures in pricing certain illiquid fixed-income securities in the portfolios of the mutual funds.

UBSGAM agreed to pay $300,000 to settle the SEC’s charges.

“UBS Global Asset Management failed to fulfill one of its core delegated responsibilities on behalf of mutual funds it advises – to price securities in the mutual funds accurately,” said Merri Jo Gillette, Regional Director of the SEC’s Chicago Regional Office. “Fortunately this misconduct was brought to light quickly, so the duration was short and the harm to investors minimal.”

According to the SEC’s order instituting administrative proceedings against UBSGAM, the firm purchased on behalf of the mutual funds approximately 54 complex fixed-income securities in June 2008 at an aggregate purchase price of approximately $22 million. Most of the securities were part of subordinated tranches of nonagency mortgage-backed securities whose underlying collateral generally consisted of mortgages that did not conform to the requirements necessary for inclusion in mortgage-backed securities guaranteed or issued by Ginnie Mae, Fannie Mae, or Freddie Mac. The securities purchased also included asset-backed securities and collateralized debt obligations.

The SEC’s order finds that following the purchases, all but six of the securities were then valued at prices substantially in excess of the transaction prices, including many at least 100 percent higher. The valuations used by UBSGAM were provided by pricing sources (broker-dealers or a third-party pricing service) that did not appear to take into account the prices at which the mutual funds had purchased the securities. Some of the broker-dealer quotations were based on the previous month-end pricing; other quotes were stale and not priced daily. UBSGAM did not price the securities at fair value until it held a meeting of the firm’s Global Valuation Committee more than two weeks after UBSGAM began receiving “price tolerance reports” identifying the discrepancies between the purchase prices and the valuation of the securities based on the pricing sources. By using the valuations provided by broker-dealers or a third-party pricing service instead of the transaction prices, UBSGAM caused the mutual funds to not follow their own written valuation procedures. These procedures required the securities to be valued at the transaction price until UBSGAM received a response to a price challenge based on the discrepancy identified in the price tolerance report, or UBSGAM made a fair value determination. The procedures provided that the transaction price could be used for up to five business days until a decision needed to be made to determine the fair value. By failing to implement these procedures, UBSGAM aided and abetted and caused the funds to violate Rule 38a-1 under the Investment Company Act.

The SEC’s order further finds that because the securities were not properly or timely priced at fair value, the NAVs of the funds were misstated between one cent and 10 cents per share for several days in June 2008. Consequently, the mutual funds sold, purchased, and redeemed their shares based on inaccurately high NAVs on those days. UBSGAM thus aided and abetted and caused the funds to violate Rule 22c-1 adopted pursuant to Section 22(c) of the Investment Company Act.

In settling the charges without admitting or denying the SEC’s findings, UBSGAM agreed to be censured and to pay a $300,000 penalty, and also consented to a cease-and- desist order from committing or causing violations of Rules 22c-1 and 38a-1 under the Investment Company Act. The SEC acknowledges the assistance and cooperation of UBSGAM during the examination and investigation.