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UBS Fined $33.5 million by FINRA, SEC for Puerto Rico Funds

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UBS Financial Services of Puerto Rico (UBSPR), a unit of UBS Group AGUBS has been charged by the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) with a penalty of $33.5 million. Out of the total, $18.5 million has been fined by FINRA on the unit's failure of supervising the sale of Puerto Rican closed-end mutual funds of certain clients in the U.S. Additional $15 million has been levied by the SEC for disgorgement, interest and penalties related to the same case.

Though the firm agreed to the settlement, the charges were neither accepted nor denied by the UBSPR.

FINRA accused UBSPR claiming fraud, unsuitable investments, negligence and breach of contract, to name a few. The regulators' claims pertained to investments in UBS-managed closed-end funds (CEFs) for certain clients in Puerto Rico. Moreover, it was claimed that investors were guided by UBS to open lines of credit (LOCs) for buying additional shares of such CEFs.

FINRA says the poor supervision persisted "for more than four years," with UBSPR failing 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."

According to the SEC, these Puerto Rico CEFs were invested in the bonds issued by the government of Puerto Rico and related entities. The value of Puerto Rico bonds and funds plunged heavily in August, which led clients to liquidate their investments to pay loans.

Further, the SEC alleged UBSPR and its branch officer - Ramiro Colon failed to monitor registered broker - Jose Ramirez's activities. Ramirez persuaded clients to borrow from UBS Bank USA and invest in UBSPR-affiliated CEFs. As a result, investors recorded losses while the broker booked profits. Separately, in Puerto Rico federal court, a complaint has been filed against Ramirez by the SEC for misleading customers.

UBSPR will settle the SEC charges with the payment of $15 million, which will be transferred to a fund for investors who lost their hard-earned money in the fraud. Further, Colon has been suspended from the supervisory role and has been charged a $25,000 penalty.

UBSPR agreed to the settlement with the FINRA for $7.5 million in fees and another $11 million for compensating 165 investors who FINRA said "were forced to realize losses on their CEF positions."

UBS Group is currently combating numerous arbitration claims filed with FINRA that seek a total of over $1 billion in damages. While some claims have been rewarded; at times, the awarded amounts have been less than those claimed. Notably, last month, the Swiss banking giant was ordered to pay around $2.5 million to a retired couple in San Juan, who had asked for $3-$6 million in damages.

Earlier this month, the wealth management arm of UBS Group was ordered to pay over $2.9 million to two investors for losses related to Puerto Rico municipal bonds. The arbitration panel awarded the investors a total amount of $2.4 million in damages, plus interest, along with over $534,000 in legal and other costs.

While regulators are focused on resolving investor claims, Puerto Rico's debt crisis continues to worsen. In fact, Puerto Rico, whose current debt stands at $73 billion, recently disclosed that it is $13 billion short of the amount required to cover debt payments over the next 5 years.

UBS Group currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the foreign banks space include Mitsubishi UFJ Financial Group, Inc. MTU , Mizuho Financial Group, Inc. MFG and Deutsche Bank AG DB . All these stocks sport a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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