UBS Operations Settle With SEC Over Collapse Of Auction Rate Securities Market

by Philip Morton, Investors Offshore.com

11 August 2008

A preliminary settlement was reached on Friday between two UBS operations and the US Securities and Exchange Commission over the bank's treatment of investors in auction rate securities (ARS).

The settlement between the SEC and UBS Securities LLC and UBS Financial Services, Inc. (collectively, UBS) included proposed charges and a plan that would restore approximately USD22bn in liquidity to customers who invested in auction rate securities.

This plan includes approximately USD8.2bn for individual investors, small businesses, and charitable organizations, USD3.3bn for holders of tax-exempt Auction Preferred Shares (subject to regulatory review), and USD10.3bn for institutional investors.

The ARS market collapsed in mid-February 2008, leaving over 40,000 UBS customers holding these illiquid securities indefinitely. The conduct underlying the proposed charges stems from UBS’s marketing of auction rate securities as cash alternatives. However, the liquidity of these securities was premised on UBS providing support bids for auctions it managed when there was not enough customer demand, but this was not adequately disclosed to customers.

When UBS stopped supporting auctions in February 2008, it led to widespread auction failures for UBS customers.

Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement, stated that:

“The Division’s agreement in principle with UBS, if approved by the Commission, will quickly restore liquidity to tens of thousands of UBS investors. In a short time, approximately 31,300 individual, charitable, and small business investor accounts will receive more than USD8.2bn in liquidity, and approximately 9,200 investor accounts holding tax-exempt Auction Preferred Shares will receive nearly USD3.3bn in liquidity. UBS also will begin the process of restoring USD10.3bn in liquidity to approximately 1,000 institutional investor accounts.”

UBS faces the prospect of a financial penalty to the SEC after it has completed its obligations under the settlement agreement.

The SEC explained on Friday that:

"Determinations as to the amount of the penalty, if any, will take into account, among other things, an assessment of whether UBS has satisfactorily completed its obligations under the settlement, and the costs incurred by UBS in meeting those obligations, including penalties incurred and the cost of remediation."

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