The SEC has charged an investment advisory arm of UBS with overstating the prices of securities in three mutual funds, some times by more than 100%.

The federal regulator that that the failure “to properly price securities” in three mutual funds that it managed resulted in the mismarking of the net asset values of those funds.

“UBS Global Asset Management failed to fulfill one of its core delegated responsibilities on behalf of mutual funds it advises – to price securities in the mutual funds accurately,” said Merri Jo Gillette, Regional Director of the SEC’s Chicago Regional Office. “Fortunately this misconduct was brought to light quickly, so the duration was short and the harm to investors minimal.”

UBS' asset management arm agreed to pay $300,000 to settle the charges.

"UBS Global Asset Management is pleased to have resolved this issue with the SEC,'' said spokesperson Karina Byrne.  

The firm said it relied on pricing data from independent third parties, rather than the purchase price, to value a group of mortgage-backed securities purchased by a small number of the its mutual funds in the United States.

"The impact on those funds was minimal,'' Byrne said. "As a matter of course, the firm regularly reviews its procedures in an effort to ensure its valuations and pricing are as accurate as possible.”

The alleged misconduct was revealed during the course of an SEC examination, the agency said.

According to the SEC, UBS purchased approximately 54 complex fixed-income securities in June 2008 for $22 million.

Most of the securities were part of subordinated tranches of non-agency mortgage-backed securities, the SEC said. That meant their underlying collateral generally consisted of mortgages that did not conform to the requirements necessary for inclusion in mortgage-backed securities guaranteed or issued by the Government National Mortgage Association, the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation.

The securities that were bought also included asset-backed securities and collateralized debt obligations.

The SEC said its investigation found that UBS Global Asset Management did not follow the mutual funds’ fair valuation procedures in pricing illiquid fixed-income securities in mutual funds.

The SEC said all but six of the securities were then valued at prices “substantially in excess of the transaction prices, including many at least 100 percent higher.”

The valuations provided by pricing services that UBS used did not appear to take into account the prices at which the mutual funds had purchased the securities, the regulator said.

Some of the broker-dealer quotations were based on the previous month-end pricing; other quotes were stale and not priced daily.

According to the SEC:

UBSGAM did not price the securities at fair value until it held a meeting of the firm’s Global Valuation Committee more than two weeks after UBSGAM began receiving “price tolerance reports” identifying the discrepancies between the purchase prices and the valuation of the securities based on the pricing sources.

As a result, the net asset values of the funds were misstated between one cent and 10 cents a share for several days in June 2008.

In November, the SEC fined UBS Securities for improper handling of short sales. the Securities and Exchange Commission is for $8 million. The $8 million fine followed a $12 millon fine imposed by the FInancial Industry Regulatory Authority on October 26.

Tom Steinert-Threlkeld writes for Securities Technology Monitor.



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