New York Stock Exchange Regulation, along with the New Jersey Bureau of Securities, today announced that UBS Financial Services was fined $49.5 million for failure to supervise the deceptive market timing activities of its brokers.
According to the NYSE, from January 2000 through December 2002, reps in at least seven UBS branches engaged in deceptive market timing to benefit certain hedge fund customers at the expense of mutual funds and their shareholders. The brokers used a variety of methods to conceal their identities, including multiple ID numbers, customer accounts and “under-the-radar” trading (splitting one trade into many smaller ones).
And yet another brokerage gets dinged for what was apparently a very common practice among financial advisors. It should be noted that market timing, where financial advisors sought to exploit fund share prices that are based on closing prices of foreign securities established some time before the fund calculated its own share price, or dipping in and out of funds in what has been described as an “abusive” way (a.k.a. time-zone arbitrage), was not technically illegal; indeed some funds promoted it. But most fund companies hated the practice for its potential to disrupt its managers’ investing strategies.
According to the NYSE, the mutual fund companies sent more than 1,000 notices to UBS brokers, branch managers, the operations department and the compliance department complaining about the frequency and volume of the trading. Yet, even after receiving the notices, the reps continued the market timing, the NYSE says.
UBS management is culpable because it didn’t have policies or procedures that require employees to alert the compliance department or senior supervisors. After conducting an internal review in October 2001, the firm discovered that certain brokers were indeed using deceptive market timing practices. In December 2001, UBS management issued a memo telling employees and mutual fund companies that the practice would no longer be tolerated. Yet, the activity continued through December 2002. (One rep made 58,000 trades despite the memo.)
“When a brokerage firm permits a hedge fund or any other market participant to trade deceptively and gain an unfair advantage over other investors, it has violated the trust that forms the foundation of our capital markets,” said Richard Ketchum, chief regulatory officer of the NYSE. “UBS’ failure to have adequate controls in place led to this unfortunate occurrence.”
One UBS broker echoed what many reps in the industry say about market timing: “It was never considered to be so bad a few years ago.” The rep added that a few years ago he had approached his own manager about some timing business, seeing it as an opportunity to game the system. “Back then it was real easy to buy an annuity and invest it in a foreign fund because the pricing was always a day behind,” he says. “Compliance said no, but we heard about other guys doing it. In hindsight, I’m glad I didn’t get into it.”
