(Changes headline; adds information on UBS settlement with regulators and on the SEC lawsuit)
By Nate Raymond and Suzanne Barlyn
Sept 29 (Reuters) - A unit of UBS AG on Tuesday agreed to pay almost $34 million to settle charges from two U.S. regulators that it failed to supervise the sale of Puerto Rican closed-end mutual funds it sponsored to clients in the U.S. territory.
The U.S. Securities and Exchange Commission also said it sued a former financial adviser at UBS Financial Services Inc of Puerto Rico, claiming he misled investors who bought $50 million of shares in the funds, which invested heavily in Puerto Rico municipal bonds.
Without admitting or denying guilt, the UBS unit agreed to pay the Financial Industry Regulatory Authority $7.5 million for failing to have systems that monitored whether sales were suitable to customers’ risk objectives and goals. FINRA said it also ordered the Puerto Rican unit to pay about $11 million in restitution to 165 customers who lost money on the funds.
FINRA, Wall Street’s industry-funded watchdog, said that UBS failed to monitor the combination of leverage and concentrations of the funds in customers’ accounts.
Simultaneously, the U.S. SEC said it will collect $15 million in disgorgement, interest and penalties from UBS of Puerto Rico that will be put into a fund for investors it had harmed.
UBS spokeswoman Karina Byrne said the bank is pleased to have resolved the regulatory matters, which were initiated in early 2014.
“We remain dedicated to serving our (Puerto Rico) customers during this difficult economic time for the Commonwealth,” she wrote in an e-mail.
The SEC said former branch manager Ramiro L. Colon III agreed to pay a $25,000 penalty and be suspended from a supervisory role for one year.
The SEC also said it filed a federal complaint in Puerto Rico against former broker Jose Ramirez, 56, accusing him of convincing clients to borrow money from UBS Bank USA, in Utah, to finance purchases of the non-exchange traded closed-end mutual funds. It alleges that Ramirez earned at least $2.8 million for funds clients bought with their credit lines but evaded detection for the practice by having them transfer money to an outside bank before purchasing the funds.
FINRA said Ramirez misled investors about the safety of the strategy by failing to disclose that UBS could make margin calls and sell some of their portfolio at a loss if their collateral fell. It also said he allowed their accounts to become too highly concentrated in Puerto Rican securities.
The Puerto Rican bond market declined in 2013, leading to at least $37 million in margin calls for Ramirez’s clients.
Guillermo Ramos-Luiña, a lawyer for Ramirez, declined comment.
UBS’s Byrne declined to comment on the suit against Ramirez, who was fired in January 2014.
UBS is still defending itself against hundreds of arbitration claims that clients filed with FINRA, which collectively seek more than $900 million in damages.
Some of the funds lost half to nearly two-thirds of their value between March 2011 and October 2013, amid fears about defaults in Puerto Rico’s debt.
The case is Securities and Exchange Commission v. Ramirez, U.S. District Court, District of Puerto Rico, No. 15-02365. (Reporting by Nate Raymond and Suzanne Barlyn in New York, additional reporting by Jed Horowitz; editing by David Gregorio and Diane Craft)