SEC Sanctions UBS Re Sales Practices

The Commission has brought a series of cases involving investment advisers, broker-dealers and the fees charges to clients. Typically the clients are disadvantaged by not being informed about or given the opportunity to purchase mutual fund shares at the most advantageous price. See, e.g., In the Matter of Cadaret, Grant & Co., Adm. Proc. File No. 3-18087 (August, 1, 2017); In the Matter of Credit Suisse (U.S.A.), Adm. Proc. File No. 17899 (April 4, 2017).

The most recent case brought by the SEC in this area involves clients purchasing mutual funds shares that carried fee and charges that benefited the broker rather than shares without such additional expenses. In the Matter of UBS Financial Services Inc., Adm. Proc. File No. 3-18270 (Oct. 27, 2017). Respondent UBS is a subsidiary of UBS AG, a registered investment adviser and broker-dealer.

Mutual funds have different share classes that represent a common interest in an investment portfolio but have different sales charges and/or expenses. The sales charges and/or expenses are typically imposed as a percentage of the investment. The charges and fees also impact the revenue earned by a broker-dealer. Typically the broker receives all or part of the sales charges and Rule 12b-1 fees charged to their customers.

Over a five year period beginning in January 2010 UBS did not have adequate systems and controls to determine if a customer was eligible to purchase a class of mutual fund shares on which the fees were waived. As a result the firm failed to provide 113,543 customers involved in about 15, 250 transactions with fee waived shares. Those customers could have purchased fee waived shares but were not furnished the opportunity by UBS. Instead the firm recommended, and customers purchased, shares that had a sales charge. In these transactions UBS also failed to advise clients about the fees it would earn if they purchased shares that had a sales charge. The information about the cost structure of the different shares would have been important to a reasonable investor.

UBS has identified the customers involved. Those customers paid $18,529,533 in charges and higher fees and expenses from purchasing mutual fund shares for which they were not informed of the options regarding the various classes of shares. The firm has issued credits to all eligible customers. The firm has also undertaken to make reasonable additional efforts to locate and/or contact eligible customers who either have not yet cashed or deposited their payments or who otherwise nave not received the payment. The Order alleges violations of Securities Act Sections 17(a)(2) and (3).

To resolve the proceedings, UBS consented to the entry of a cease and desist order based on the Sections cited in the Order and to a censure. The firm will also pay a penalty of $3.5 million.

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