Securities Regulators Announce Settlement with UBS in Auction Rate Securities Investigation

WASHINGTON, D.C. August 11, 2008 — Karen Tyler, President of the North American Securities Administrators Association (NASAA), announced today that a settlement in principle has been reached between UBS Securities LLC and UBS Financial Services, Inc. (UBS) and state and federal securities regulators.  The settlement will provide thousands of UBS clients with access to billions of dollars in funds that have been frozen in the ARS market.

The agreement will resolve enforcement actions filed by the Massachusetts Securities Division, the New York Attorney General, and the Texas State Securities Board.  In those cases, the state regulators alleged that UBS had misled its clients by falsely assuring them that ARS securities were as safe and liquid as cash.

The ARS markets froze in February this year, triggering a flood of complaints from investors who could not withdraw money from their accounts.  The states also alleged that UBS knew about the impending collapse of the ARS market, and took steps to reduce its own exposure, but nevertheless continued to sell ARS securities to its clients.

“This settlement is another important step in our ongoing effort to make sure that investors across the country quickly regain access to their funds that were placed in auction rate securities,” said Tyler.  “As we have said before, securing a liquidity solution for investors has been the primary objective of our investigations, and this agreement achieves that goal with another Wall Street firm that was heavily involved in the auction rate market.”

Under the terms of the settlement, UBS will buy back, no later than October 31, 2008, all illiquid auction rate securities from all UBS retail customers, including charities, who have less than $1 million on deposit.  In addition, no later than January 2, 2009, UBS will buy back all illiquid auction rate securities from all other UBS retail customers, charities, and small to mid-sized businesses.  These customers, who number approximately 40,000 nationwide, have been unable to sell their securities since February 13, 2008.

UBS will also:

  • Fully reimburse all retail investors who sold their auction rate securities at a discount after the market failed in February 2008;
  • Consent to a special, public arbitration procedure to resolve claims of consequential damages suffered by retail investors as a result of not being able to access their funds, in which UBS will not contest its liability for the illiquidity of the auction rate securities and in which UBS will pay all forum fees;
  • Undertake to expeditiously provide liquidity solutions to all other institutional investors, with regular progress reports and subject to an outside deadline of June 30, 2010; and
  • Reimburse all refinancing fees to municipal issuers who issued auction rate securities through UBS since August 1, 2007, and who refinanced those securities after the market failed.

As part of the settlement, UBS will pay the State of New York a civil penalty in the amount of $75 million. UBS will also pay a separate civil penalty of $75 million to the other states collectively.

“Massachusetts, New York, and Texas took leading roles in investigating UBS’s misconduct, and the settlement resulted from a coordinated and collaborative effort, both during the investigations and at the negotiating table.  It’s another excellent example of state securities regulators working together to protect investors,” said Tyler.  “We also acknowledge UBS for its willingness to step forward and implement solutions that its clients sorely need.”

The widespread marketing of auction rate securities as cash equivalents, followed by the collapse of the ARS auction market, has left thousands of investors without access to their money.  Individuals, small businesses, and institutional investors have all suffered financial hardship, ranging from the inability to close on home purchases to shortfalls in payroll.  The problem has been compounded because in many cases, clients’ ARS holdings not only froze, but also lost value.

The state cases filed against UBS are part of a larger state-led effort to address problems in connection with the sale of ARS securities.  Earlier this year, state offices began receiving complaints from Main Street investors throughout the country.  As a result, in April, NASAA announced the formation of a multi-state Task Force, comprised of securities regulators in 12 states, to investigate whether the nation’s prominent Wall Street firms had systematically misled investors when placing them in ARS securities.

The members of the Task Force are continuing their investigations into possible misconduct by other firms.   Massachusetts has also filed an action against Merrill Lynch alleging that it too misled investors in the sale of ARS securities.

NASAA is the oldest international organization devoted to investor protection. Its membership consists of the securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada, and Mexico.

For more information:
Bob Webster, Director of Communications

Rex Staples, General Counsel

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