UBS Financial Services Inc. of Puerto Rico agreed to pay a combined $34 million to settle allegations from the Securities and Exchange Commission and the Financial Industry Regulatory Authority that the firm failed to adequately supervise sales of Puerto Rican closed-end fund shares.
According to regulators, for more than four years UBS’ Puerto Rican business unit failed to properly ensure customer transactions of closed-end funds were suitable and failed to adequately monitor leverage and concentration levels in affected customer accounts.
"UBS of Puerto Rico operated in a unique economy and ultimately failed to tailor its supervisory systems to its specific business needs. Despite the fact the firm was very familiar with the unusual characteristics of its retail accounts, it did not supervise these transactions properly to prevent customers' heightened exposure to risk,” Brad Bennett, FINRA’s executive vice president of enforcement, said in a statement Tuesday.
UBS agreed to pay FINRA $7.5 million in fines for supervisory failures and to pay approximately $11 million in restitution to 165 customers who experienced losses on their closed-end fund positions.
In addition to its broader supervisory failures, the SEC claimed the Switzerland-based brokerage and a Puerto Rico-based branch manager also failed to supervise a former broker who misled customers about the safety of the closed-end funds and boosted his commissions by persuading clients to invest in these funds with borrowed money.
Former UBS broker Jose Ramirez Jr. fraudulently increased his compensation by at least $2.8 million by convincing customers to use proceeds from lines of credit through UBS’ U.S. bank operations to purchase additional shares of UBS’ Puerto Rican closed-end mutual funds, according to the separate civil complaint filed by the SEC against Ramirez on Tuesday.
“We allege that Ramirez sold tens of millions of dollars of closed-end funds to certain customers while lying to them about the safety of his risky leverage strategy and as a result, those UBS Puerto Rico customers suffered significant losses,” Eric I. Bustillo, director of the SEC’s Miami Regional Office, said in a statement.
Ramirez, who worked out of UBS’ Guaynabo branch office, was fired by UBS in January 2014. According to the SEC’s order, UBS lacked procedures and systems to detect and prevent Ramirez’s misconduct.
As part of its settlement with the SEC, UBS agreed to pay $15 million in fines and restitution, which the regulator says will be used to compensate affected investors.
Additionally, the former Guaynabo branch officer, Ramiro L. Colon III, agreed to pay a $25,000 penalty to settle claims he failed in his supervisory responsibility. The SEC alleges Colon was aware Ramirez could have been using a line of credit to purchase closed-end funds and ignored warning signs. But instead of investigating, Colon accepted Ramirez’s explanation and did not follow up.
According to the SEC’s order and BrokerCheck, Ramiro is still employed with UBS, but has been removed from a supervisory role. As part of his settlement, Colon also agreed to a one-year suspension from any supervisory roles.
In agreeing to settle with regulators, UBS neither admitted nor denied the allegations. A spokeswoman for UBS said Tuesday the firm was pleased to have resolved these matters with the SEC and FINRA, noting the regulators initiated the investigations in early 2014. "We remain dedicated to serving our customers during this difficult economic time for the Commonwealth," she added.