UBS will cough up more than $14 million (US$10 million) after the US Securities and Exchange Commission found it had violated rules giving retail investors priority in municipal bond offerings.
According to the SEC, UBS improperly allocated bonds intended for retail investors to parties known in the industry as "flippers" over a four year period.
These investors then immediately sold or "flipped" the bonds to other broker-dealers at a profit.
The SEC found that UBS registered representatives knew or should have known that flippers were not eligible for retail priority.
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It also found that these representatives facilitated 2000 trades with flippers, allowing the investment manager to "obtain bonds for its own inventory, thereby circumventing the priority of orders set by the issuers and improperly obtaining a higher priority in the bond allocation process".
UBS has consented to a cease-and-desist order which finds it had violated disclosure, fair dealing and supervisory provisions, however it did not go as far as admitting to or denying any of the findings.
"Retail order periods are intended to prioritize retail investors' access to municipal bonds and we will continue to pursue violations that undermine this priority," said LeeAnn G. Gaunt, chief of the Division of Enforcement's Public Finance Abuse Unit.
The order includes a US$1.75 million penalty, US$6.74 million in disgorgement of ill-gotten gains, as well as over US$1.5 million in prejudgment interest.
The SEC also settled proceedings against two UBS representatives; William Costas and John Marvin over the flipping charges.
"The SEC's order finds that Costas and Marvin negligently submitted retail orders for municipal bonds on behalf of their flipper customers and that Costas also helped UBS bond traders improperly obtain bonds for UBS's own inventory through his flipper customer," it said.
Costas and Marvin agreed to settle the charges without admitting or denying the regulator's findings.
Costas will cough up disgorgement and prejudgement interest totalling US$16,585, as well as a US$25,000 civil penalty. Marvin is set to pay US$27,966 and US$25,000 in the settlement. Both Costas and Marvin have consented to a 12-month limitation on trading negotiated new issue municipal securities.