NEWS: UBS Fined $750,000 for Failure to Supervise

UBS was ordered to pay $750,000 to satisfy claims that accuse the brokerage firm of failure to supervise and inadequate supervisory systems regarding trading errors at UBS retail branches that resulted in short positions in tax-exempt municipal bonds.

Because of these failures, UBS allegedly made inaccurate representations to more than 4,000 firm customers, telling them that the $1.165 million in interest that UBS paid to them was tax exempt. Because the interest paid to firm customers came from UBS, it was taxable as ordinary income.

According to FINRA, UBS did have an automated system that it used to calculate the interest it owed to its customers but this system failed to take into account what party was paying the interest. Interest paid from the firm should have been considered taxable, while interest paid from the municipal issuer could have been tax deductible.

It is typical for municipal bonds to yield tax-exempt interest payments semi-annually. This is the only type of interest that is considered exempt from federal income tax. If a brokerage firm pays substitute interest to its customers, as UBS is accused of doing, the firm must notify customers that this money is taxable.

It is normal for brokerage firms to cover municipal short positions, but when they do, they must inform customers of the difference and that this type of interest is taxable. According to FINRA, UBS would sometimes go a month and in some cases up to a year without covering municipal short positions.

FINRA accuses UBS of:

  • Supervisory failures that led to inaccurate representations of taxable vs. tax-exempt interest
  • Delayed covering of municipal short positions
  • Failure to disclose to customers that their interest was not tax-exempt in cases where the firm was short municipal securities
  • Sending customers incorrect Forms 1099 and inaccurate account statements
  • Failure to maintain records of customer accounts offsetting its short municipal bond positions

As a result of FINRA’s findings, UBS consented to the imposition of a censure and $750,000 fine.


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