UBS Unit To Pay $34 Mln To Settle Puerto Rico Bond Fund Violations

(RTTNews) - A unit of UBS (UBS) agreed to pay about $34 million in settlements with U.S. regulators regarding the sale of Puerto Rico bond funds that plunged in value in recent years.

The Securities and Exchange Commission charged UBS Financial Services Inc. of Puerto Rico or UBSPR and a former branch manager for failing to supervise a former broker who had customers invest in UBSPR affiliated mutual funds using money borrowed from a UBSPR affiliated bank. UBSPR and the bank prohibited using such loans to purchase securities and the practice exposed investors to losses while producing profits for the former UBSPR broker, the SEC alleged.

UBSPR agreed to settle the SEC's charges by paying $15 million in disgorgement, interest, and penalties, which will be placed into a fund for harmed investors. The former branch officer, Ramiro L. Colon III, agreed to a settlement in which he will pay a $25,000 penalty and be suspended from a supervisory role for one year.

The Financial Industry Regulatory Authority or FINRA announced that it has censured and fined UBS Financial Services Incorporated of Puerto Rico $7.5 million for supervisory failures related to the suitability of transactions in Puerto Rican closed-end fund (CEF) shares. In addition, FINRA ordered UBS PR to pay approximately $11 million in restitution to 165 customers who were forced to realize losses on their CEF positions.

Separately, the SEC filed a complaint in federal court in Puerto Rico against Jose Ramirez, Jr., a former registered representative in UBSPR's Guaynabo branch office. The SEC alleges that Ramirez increased his compensation by at least $2.8 million by having certain customers use proceeds from lines of credit with UBS Bank USA to purchase additional shares in UBSPR closed-end mutual funds.

To evade detection, Ramirez allegedly instructed the customers to transfer money from their line of credit to an outside bank account before depositing the funds into their UBSPR brokerage account and purchasing the closed-end funds. The funds invested heavily in Puerto Rico municipal bonds and lost value as the Puerto Rico bond market declined, requiring the customers to pay down a portion of the loans or risk having their investments liquidated.

According to the SEC's complaint, Ramirez misled customers about the safety of the closed-end funds and the risks of investing in them with borrowed money. He also is alleged to have lied to his branch manager when questioned about suspicious transactions in the closed-end mutual funds. Ramirez was terminated by UBSPR in January 2014.