DOB: UBS Financial Services - 2007 Consent Order

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IN THE MATTER OF:

UBS FINANCIAL SERVICES,
INCORPORATED
CRD NO. 8174

    ("UBS")

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  CONSENT ORDER

  DOCKET NO. CO-2007-7330-S



I. PRELIMINARY STATEMENT

WHEREAS, the Banking Commissioner (“Commissioner”) is charged with the administration of Chapter 672a of the Connecticut General Statutes, the Connecticut Uniform Securities Act (“Act”), and Sections 36b-31-2 et seq. of the Regulations of Connecticut State Agencies promulgated under the Act (“Regulations”);
 
WHEREAS, UBS is a broker-dealer registered in the state of Connecticut;

WHEREAS, the Commissioner, through the Securities and Business Investments Division (“Division”) of the Department of Banking (“Department”), conducted an investigation pursuant to Section 36b-26(a) of the Act, into the activities of UBS to determine whether UBS had violated, was violating or was about to violate any provisions of the Act or Regulations (“Investigation”);
 
WHEREAS, as a result of the Investigation, the Division alleges the following:

1. From at least January 2000 to December 2002, UBS, through agents employed in several branch offices, including New Jersey and Connecticut locations, engaged in the practice of market timing mutual funds and underlying “subaccounts” in variable annuity products, many of which were products of Connecticut-based financial institutions.  Such market timing occurred in client accounts maintained at UBS;
2. Market timing is the practice of trading in and out of mutual funds in order to exploit inefficiencies in mutual fund pricing and capture a profit at the expense of long-term investors and the mutual funds;
3. On several occasions during 2000 through 2002, UBS and its agents were advised directly by mutual funds and variable annuity companies that market timing was prohibited and should be ceased;
4. In December 2001, UBS adopted a policy that prohibited mutual fund market timing.  The policy indicated that UBS would not open or maintain accounts for any client seeking to follow a market timing strategy involving a mutual fund, variable annuity (or other insurance product) or any other product that has mutual funds as the underlying investment vehicle;
5. UBS failed to adequately enforce its December 2001 policy against mutual fund market timing;
6. At all times relevant hereto, UBS failed to maintain memoranda of orders concerning reallocations of underlying “subaccounts” in variable annuity products.  In addition, prior to August 1, 2001, UBS failed to maintain internal e-mails;
7. UBS failed to implement adequate procedures to comply with directives from mutual funds and variable annuity companies to cease market timing;

WHEREAS, as a result of the Investigation, the Division alleges that UBS’ failure to maintain certain books and records is a violation of Section 36b-31-14a of the Regulations, which may constitute a basis for the issuance of an order suspending or revoking UBS’ registration as a broker-dealer in Connecticut pursuant to Section 36b-15(a)(2)(B) of the Act and an order imposing fine pursuant to Section 36b-27(d) of the Act effective prior to October 1, 2003;
 
WHEREAS, as a result of the Investigation, the Division alleges that UBS’ failure to reasonably supervise its agents is a violation of Section 36b-31-6f of the Regulations, which may constitute a basis for the issuance of an order suspending or revoking UBS’ registration as a broker-dealer in Connecticut pursuant to Sections 36b-15(a)(2)(B) and 36b-15(a)(2)(K)(i) of the Act and an order imposing fine pursuant to Section 36b-27(d) of the Act effective prior to October 1, 2003;
 
WHEREAS, the Commissioner believes that the practice of market timing has a detrimental effect on Connecticut investors and mutual fund companies;
 
WHEREAS, in October 2003, UBS issued a Compliance Bulletin to all employees restating its policy prohibiting market timing;
 
WHEREAS, in December 2006, UBS issued a revised Compliance Bulletin concerning mutual fund market timing that was expanded to include the prohibition of frequent trading activity in mutual funds and variable annuities;
 
WHEREAS, UBS has implemented a policy and procedure requiring management’s approval for the issuance of split numbers to financial advisers;
 
WHEREAS, UBS has implemented a policy and procedure requiring that compliance personnel review all stop letters concerning market timing and frequent trading activity in mutual funds and variable annuity products;
 
WHEREAS, UBS has developed and implemented a procedure to identify accounts engaged in market timing or frequent trading activity;
 
WHEREAS, UBS has implemented a policy and procedure to maintain as a required record, client reallocation requests made to its employees concerning underlying “subaccounts” in variable annuity products;
 
WHEREAS, UBS has cooperated in the Investigation by responding to inquiries, providing documentary evidence and other materials, and providing access to facts relating to the Investigation;
 
WHEREAS, an administrative proceeding initiated under Section 36b-15 or 36b-27 of the Act would constitute a “contested case” within the meaning of Section 4-166(2) of the Connecticut General Statutes;
 
WHEREAS, Section 4-177(c) of the Connecticut General Statutes provides, in relevant part, that “[u]nless precluded by law, a contested case may be resolved by . . . consent order”;
 
WHEREAS, Section 36a-1-55(a) of the Regulations provides, in relevant part, that “[p]ursuant to subsection (c) of section 4-177 of the Connecticut General Statutes, unless precluded by law, any contested case may be resolved by . . . consent order”;
 
WHEREAS, Section 36b-31(a) of the Act provides, in relevant part, that “[t]he commissioner may from time to time make . . . such . . . orders as are necessary to carry out the provisions of sections 36b-2 to 36b-33, inclusive”;
 
WHEREAS, UBS and the Commissioner now desire to resolve the foregoing matter without the need for administrative proceedings, and agree to the language in this Consent Order.


CONSENT TO WAIVER OF PROCEDURAL RIGHTS

WHEREAS, UBS, through its execution of this Consent Order, voluntarily waives the following rights:

1. To be afforded an opportunity for a hearing within the meaning of Sections 36b-15(f) and 36b-27(d)(2) of the Act and Section 4-177(a) of the Connecticut General Statutes;
2. To present evidence and argument and to otherwise avail itself of Sections 36b-15(f) and 36b-27(d)(2) of the Act and Section 4-177c(a) of the Connecticut General Statutes;
3. To present its position in a hearing in which it is represented by counsel;
4. To have a written record of the hearing made and a written decision issued by a hearing officer; and
5. To seek judicial review of, or otherwise challenge or contest the matters described herein, including the validity of this Consent Order.


ACKNOWLEDGEMENT OF THE COMMISSIONER’S ALLEGATIONS

WHEREAS, UBS, through its execution of this Consent Order, acknowledges the following allegations of the Commissioner, without admitting or denying them:

1. The entry of this Consent Order is necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of the Act; 
2. UBS failed to maintain adequate books and records in violation of Section 36b-31-14a of the Regulations, which may constitute a basis for an order suspending or revoking its registration as a broker-dealer in Connecticut pursuant to Section 36b-15(a)(2)(B) of the Act and an order imposing fine pursuant to Section 36b-27(d) of the Act effective prior to October 1, 2003; and
3. UBS failed to reasonably supervise its agents in violation of Section 36b-31-6f of the Regulations, which may constitute a basis for an order suspending or revoking its registration as a broker-dealer in Connecticut pursuant to Sections 36b-15(a)(2)(B) and 36b-15(a)(2)(K)(i) of the Act and an order imposing fine pursuant to Section 36b-27(d) of the Act effective prior to October 1, 2003.

WHEREAS, the Commissioner would have the authority to enter findings after granting UBS an opportunity for a hearing;
 
WHEREAS, this Consent Order concludes the investigation by the Commissioner concerning the matters alleged herein and any related civil or administrative action that could be commenced under the Act or Regulations on behalf of the Commissioner relating to UBS, its current affiliates and its current employees;
 
WHEREAS, UBS acknowledges the possible consequences of an administrative hearing and voluntarily agrees to consent to the entry of the sanctions described below.


CONSENT TO ENTRY OF SANCTIONS

WHEREAS, UBS, through its execution of this Consent Order, consents to the Commissioner’s entry of a Consent Order imposing on it the following sanctions:

1. No later than the date this Consent Order is issued by the Commissioner, UBS shall remit to the Department of Banking, by electronic funds transfer, the sum of One Million Five Hundred Thousand Dollars ($1,500,000) as an administrative fine;
2.

UBS shall pay a total of One Million Two Hundred Fifty Thousand Dollars ($1,250,000) over three years to the State of Connecticut Department of Education (“Department of Education”) in order to promote financial literacy initiatives in Connecticut public schools and adult education programs funded by the Department of Education, as determined by the Commissioner of Education, and shall comply with the following provisions:

a.
The payments shall be made to the Department of Education in four equal installments of Three Hundred Twelve Thousand Five Hundred Dollars ($312,500) as follows:  UBS shall pay the first installment of Three Hundred Twelve Thousand Five Hundred Dollars ($312,500) no later than July 1, 2007; the second installment no later than July 1, 2008; the third installment no later than July 1, 2009; and the fourth installment no later than July 1, 2010.
b. No later than 30 days after each payment of Three Hundred Twelve Thousand Five Hundred Dollars ($312,500) to the Department of Education, UBS shall submit to the Division Director written evidence or acknowledgement of such payment;

3.
UBS shall pay a total of One Million Dollars ($1,000,000) over three years to the State of Connecticut Department of Higher Education (“Department of Higher Education”) in order to promote financial literacy initiatives in Connecticut colleges and universities, as determined by the Commissioner of Higher Education, and shall comply with the following provisions:
 
a.
The payments shall be made to the Department of Higher Education in four equal installments of Two Hundred Fifty Thousand Dollars ($250,000) as follows:  UBS shall pay the first installment of Two Hundred Fifty Thousand Dollars ($250,000) no later than July 1, 2007; the second installment no later than July 1, 2008; the third installment no later than July 1, 2009; and the fourth installment no later than July 1, 2010.
b. No later than 30 days after each payment of Two Hundred Fifty Thousand Dollars ($250,000) to the Department of Higher Education, UBS shall submit to the Division Director written evidence or acknowledgement of such payment;
4.
UBS shall pay a total of One Million Five Hundred Thousand Dollars ($1,500,000) over three years to the State of Connecticut Department of Social Services (“Department of Social Services”) in order to promote financial literacy initiatives for the benefit of low-income and elderly persons in Connecticut, as determined by the Commissioner of Social Services, and shall comply with the following provisions:
 
a.
The payments shall be made to the Department of Social Services in four equal installments of Three Hundred Seventy-five Thousand Dollars ($375,000) as follows:  UBS shall pay the first installment of Three Hundred Seventy-five Thousand Dollars ($375,000) no later than July 1, 2007; the second installment no later than July 1, 2008; the third installment no later than July 1, 2009; and the fourth installment no later than July 1, 2010.
b. No later than 30 days after each payment of Three Hundred Seventy-five Thousand Dollars ($375,000) to the Department of Social Services, UBS shall submit to the Division Director written evidence or acknowledgement of such payment;
5.
UBS shall pay a total of Two Hundred Fifty Thousand Dollars ($250,000) over two years to the National White Collar Crime Center (“NW3C”) for the purpose of training Connecticut regulatory and law enforcement personnel in the investigation, prevention and prosecution of financial fraud matters perpetrated on Connecticut senior citizens, and shall comply with the following provisions:
 
a.
The payments shall be made to NW3C in two equal installments of One Hundred Twenty-Five Thousand Dollars ($125,000) as follows:  UBS shall pay the first installment of One Hundred Twenty-Five Thousand Dollars ($125,000) no later than July 1, 2007; and the second installment no later than July 1, 2008.
b. No later than 30 days after each payment of One Hundred Twenty-Five Thousand Dollars ($125,000) to NW3C, UBS shall submit to the Division Director written evidence or acknowledgement of such payment;
6. UBS agrees not to take any action or to make or permit to be made any public statement denying, directly or indirectly, any finding in this Consent Order or creating the impression that this Consent Order is without factual basis.  Nothing in this paragraph affects UBS’ (i) testimonial obligations, or (ii) right to take legal or factual positions in defense of litigation or in defense of other legal proceedings in which the Department is not a party;

WHEREAS, the Commissioner believes that the sanctions contained herein are necessary to further the purposes and policies of the Act;
 
AND WHEREAS, UBS specifically assures the Commissioner that none of the violations alleged herein shall occur in the future.


CONSENT ORDER

 NOW THEREFORE, the Commissioner enters the following:

1. The Sanctions set forth above be and are hereby entered;
2. Entry of this Consent Order by the Commissioner is without prejudice to the right of the Commissioner to take enforcement action against UBS based upon a violation of this Consent Order or the matters underlying its entry, if the Commissioner determines that compliance with the terms herein is not being observed or if any representations made by UBS and reflected herein are subsequently discovered to be untrue; and
3. This Consent Order shall become final when issued.



Dated at Hartford, Connecticut
this 16th day of April 2007.               

________/s/_________
Howard F. Pitkin
Banking Commissioner

 

CONSENT TO ENTRY OF ORDER

I, Ilene Marquardt, state on behalf of UBS Financial Services Incorporated, that I have read the foregoing Consent Order; that I know and fully understand its contents; that I am authorized to execute this Consent Order on behalf of UBS Financial Services Incorporated; that UBS Financial Services Incorporated agrees freely and without threat or coercion of any kind to comply with the terms and conditions stated herein; and that UBS Financial Services Incorporated voluntarily consents to the issuance of this Consent Order, expressly waiving any right to a hearing on the matters described herein.


By: ________/s/_________
Name:  Ilene Marquardt
Title:  Deputy General Counsel
UBS Financial Services Incorporated

State of:  New Jersey
County of:  Hudson

On this the 10th day of April 2007, before me, Bernadette Pehrson, the undersigned officer, personally appeared Ilene Marquardt, who acknowledged himself/herself to be the Deputy General Counsel of UBS Financial Services Incorporated, a corporation, and that he/she, as such Deputy General Counsel, being authorized to do so, executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation by himself/herself as Deputy General Counsel.

In witness whereof I hereunto set my hand.


________/s/_________
Notary Public
Date Commission Expires:  2/17/09


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