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SEC and FINRA FINE UBS OVER PUERTO RICO BOND FUNDS
The SEC and FINRA have brought charges and fined UBS relating to sales practices and supervision of their UBS Puerto Rico Bond Funds.
The SEC press release and Orders can be found here: http://www.sec.gov/news/pressrelease/2015-217.html. The SEC alleged that UBS Financial Services of Puerto Rico (UBSPR) failed to supervise its broker in relation to solicited loans used to purchase additional UBSPR closed end funds, while failing to disclose the risks of this strategy and misrepresenting the safety of the strategy. The SEC further alleged that UBSPR did not implement reasonable supervisory procedures and had inadequate systems in place to prevent and detect this wrongful conduct.
UBS was censured and fined over fourteen million dollars.
FINRA also fined UBSPR for actions related to its Puerto Rico Bond funds - see the press release here (http://www.finra.org/newsroom/2015/finra-sanctions-ubs-puerto-rico-185-million-supervisory-failures) which states the following:
“...for more than four years, UBS PR failed to monitor the combination of leverage and concentration levels in customer accounts to ensure that the transactions were suitable given the customers’ risk objectives and profiles. The firm failed to implement a reasonably designed system to identify and prevent unsuitable transactions in light of the unique Puerto Rican economy, in which retail customers typically maintained high levels of concentration in Puerto Rican assets and often used those highly concentrated accounts as collateral for cash loans. Despite UBS PR’s knowledge of these common practices, it failed to adequately monitor concentration and leverage levels to identify whether certain customers’ CEF transactions were suitable in light of the increased risks in their existing portfolio.”
The above sales practices and lack of supervision have formed the basis of hundreds of FINRA arbitration claims pending against UBS and UBSPR. If you would like to speak to an attorney about possible claims related to UBS of Puerto Rico bond funds, please read more about these claims at Greco & Greco’s website (http://www.securities-lawyers.net/ubs_puerto_rico.html) and contact Scott Greco for a free consultation (http://www.securities-lawyers.net/contact.html).
Posted by W. Scott Greco on 10/09/15.
Closed End Funds ( CEF ) • Puerto Rico • Arbitration • Bonds • Brokerage Firms • UBS Financial Services of Puerto Rico • UBS • FINRA • Mutual Funds • SEC • Securities Fraud • Suitability • Permalink
Success of FINRA Arbitration Claims against UBS regarding Puerto Rico Bond Funds
To date, FINRA Arbitration Panels have issued five awards relating to claims filed by investors against UBS and UBS of Puerto Rico regarding their Puerto Rico Closed End Bond Funds (CEFs).
The Awards (for cases filed after the 2013 crash of the CEF market) are summarized below:
1. Bauza v. UBS Financial Services of Puerto Rico, et al.. Greco & Greco represented the Claimant in this case which resulted in the first award against UBS regarding the Puerto Rico CEFs. UBS claimed that the Claimant only had $8,000 in net losses from the funds, but the panel awarded $200,000.00. The case was tried in Washington, DC.
2. Rosado v. UBS Fin. Serv. of Puerto Rico, et al. Claimant sought $1,033,596 in damages. The arbitration panel issued a written opinion (not common in FINRA arbitrations) making the following findings: a. “In the process of reducing its exposure in the CEFs by some 75%, UBS undertook an internal push for its brokers to sell its inventory to customers;” b. “this account was extremely over-concentrated and clearly unsuitable for Claimant;” and c. “proper and required supervision could have prevented Claimant’s losses or at least limited them greatly.”
The panel Ordered UBS to rescind the sales of the CEFs by repurchasing Claimant’s account for $1,000,000.
3. Ramis v. UBS Fin. Serv. of Puerto Rico, et al. The Claimants in this case requested 2 - 2.5 million dollars in compensatory damages. The panel awarded $250,000 against UBS.
4. Rodriguez Gonzalez v. UBS Fin. Serv. of Puerto Rico, et al. Claimants requested damages at the end of the hearing of 3 to 6 million dollars. The panel awarded $2,545,000.00.
5. Lopez Del Valle v. UBS Fin. Serv. of Puerto Rico et al. This case involved a large number of Claimants, however, all but three Claimants settled their claims prior to the final hearing. The orignal Statement of Claim requested ten million dollars in damages, but the award is not clear how much of those damages were requested by the three remaining Claimants. The arbitration panel awarded $2,395,402.00 in compensatory damages, interest from the filing of the Statement of Claim, $50,000 in costs, $5,000 in expert witness fees, and significantly, $479,079.80 in attorneys fees.
In summary, all of the arbitration panels that have heard these cases have issued awards in favor of Claimants, with one also awarding attorneys fees. If you would like to speak to an attorney about possible claims related to UBS of Puerto Rico bond funds, please read more about these claims at Greco & Greco’s website (http://www.securities-lawyers.net/ubs_puerto_rico.html) and contact Scott Greco for a free consultation (http://www.securities-lawyers.net/contact.html).
First FINRA Arbitration Award Against UBS of Puerto Rico Regarding Bond Funds
Greco & Greco is pleased to report the first FINRA Arbitration Award against UBS Financial Services of Puerto Rico relating to the crash of UBS closed end bond funds in 2013 which were sold to Puerto Rico residents. W. Scott Greco represented the Claimant customer in the case of Bauza v. UBS Financial Services of Puerto Rico, et al. The arbitration panel awarded $200,000 in damages to the Claimant, despite claims by UBS that Claimant’s net out of pocket losses were less than $10,000.
The case involved a heavy over-concentration of the Claimant’s UBS account in proprietary UBS closed end bond funds pursuant to UBS’s recommendations. The funds invested heavily in Puerto Rico bonds using leverage (a speculative investment technique), and had significant geographic concentration risk.
Read about the arbitration award in this Reuters article.
If you wish to discuss claims againt UBS involving these funds, please contact Scott Greco for a free consulation.
New FINRA Suitability Rule Goes Into Effect
As of July 9, 2012, FINRA’s new suitability Rule (Rule 2111) takes effect to replace the old NASD/FINRA Rule 2310. The new Rule can be found here.
The new suitability Rule, and its supplemental material, contains several clarifications which are important for investor protection. First, the Rule clearly states that recommendations of investment strategies as well as transactions fall under the rule. The supplemental material further states that “investment strategy” is to be interpreted broadly, including recommendations to hold securities.
The new Rule also sets out more specifically investor financial information that a registered representative must consider when making recommendations. Specific information includes: “customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.” The Rule also sets out a standard to be applied in regard to the representative’s efforts to discover customer suitability information: “reasonable diligence” is required to discover the customer’s investment profile.
The supplemental material to the Rule further clarifies FINRA standards regarding three kinds of suitability: reasonable-basis suitability, customer-specific suitability, and quantitative suitability. Reasonable basis suitability is required due diligence on a security before it can be recommended to customers - this issue can arise in private placement or TIC situations where the security is not on a national exchange. Customer specific suitability is, as described above, recommending a security only if it is suitable for a customer’s specific situation. Quantitative suitability is in essence a ban on churning - representatives cannot recommend (or trade with discretion) if the number of trades is excessive in light of the customer’s financial situation and investment profile. Turnover rates and cost-equity ratios are often used to demonstrate the lack of suitability of churned accounts.
Schwab YieldPlus Losses
In a decline that has been described as “one of the more spectacular meltdowns in mutual fund history” by this San Francisco Chronicle article, the Schwab YieldPlus fund has declined by over 25% this year.
The Schwab Yield Plus fund was supposed to be an ultra short term bond fund which was a “smart alternative for your cash,” but investors who expected the safety of a money market fund have suffered significant damages. As shown by this Morningstar report, the fund invested almost 50% of its assets in mortgage related securities.
Investors who invested in the Schwab YieldPlus fund expecting a cash or money market alternative and subsequently lost a portion of their savings should contact an attorney to discuss their legal options. Greco & Greco is a law firm experienced in filing arbitration claims against brokerage firms based on misrepresentations, omissions, securities fraud, and other wrongful conduct.
Morgan Stanley Fined $250,000 by Rhode Island
The Rhode Island Department of Business Regulation fined Morgan Stanley $250,000 for failing to supervise sales representatives at its Providence, Rhode Island office. According to the Rhode Island press release below, the charges related to the replacement of mutual funds with more expensive mutual funds and variable annuities.
Rhode Island Press Release
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