UBS Doesn’t Learn Its Lesson

Despite hundreds of FINRA arbitration claims, UBS simply hasn’t learned its lesson when it comes to selling high risk, speculative bond funds. Even in the wake of last week’s $5.2 million settlement by Puerto Rico’s regulator regarding the funds and their sales practices, UBS has re-upped its recommendation that brokers sell the closed-end bond funds to clients. The Financial Industry Regulatory Authority (FINRA,) Wall Street’s watchdog, requires that recommendations made by brokers be “suitable” based on criteria such as investors’ age, risk tolerance and financial investment sophistication. Puerto Rico regulators interviewed a group of investors as part of an investigation into the bond funds, attempting to assess the suitability of the funds to the clients. They found the sampling of investors interviewed to be elderly with low net worth, and not financially savvy. Most wanted to invest conservatively. These findings were not in accordance with the type of client who should be putting his or her money into Puerto Rican bond funds.

The Puerto Rican closed-end bond funds tend to carry significant risk for investors, and have declined drastically in value over the past year. The decline in value as well as the allegation that UBS brokers persuaded clients to borrow money in order to invest in the unsuitable funds, resulted in more than 500 arbitration claims against the brokerage firm in the past year alone. To add insult to injury, Puerto Rico’s debt has been downgraded to junk status per ratings agencies. If UBS continues to allow and even insist its brokers recommend these unsuitable and depreciated funds to investors, it is likely hundreds of FINRA claims will be filed against it this year. The possibility is great that the U.S. territory will not be able to make good on its bond obligations, leaving unassuming investors high and dry.

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