In mid-November, UBS AG agreed to pay $100,000, and other sanctions, to settle charges it failed to disclose that it traded favors like high-end office space in exchange for hedge funds' business.  Doug Cornelius of Compliance Building thinks the disclosure issue was "a tough one to swallow from a compliance perspective."  

UBS also will have to hire an independent consultant to review its disclosure policies and report back to Galvin's office on what steps have been taken to keep investors fully informed.  A UBS spokesperson said the firm is pleased to have resolved this matter.

    Charges by Massachusetts.   Massachusetts Secretary of the Commonwealth William Galvin made the announcement, which he said ends an 8-year investigation into so-called hedge fund hotels, where start-up hedge fund managers receive low-rent office space in high-end buildings.  In return, the newcomers were expected to send their trading business to UBS, Galvin charged.

When the investigation was first made public three years ago, Galvin charged there was a conflict that harmed investors who did not know the hedge funds were receiving beneficial treatment in return for sending the bulk of their business to UBS.  UBS offered Boston-based hedge funds office space with amenities such as IT service, pantries stocked with snacks, catered lunches, and receptionists, for less than half the market rate, according to Galvin.

The buildings are in the city's financial district, near the harbor, Federal Reserve Bank of Boston and the city's main train station.  If the funds failed to deliver enough business, they were asked to move out.  Mr. Galvin noted that UBS was not the only bank trading these sorts of favors;  the practice occurred in other large cities, as well. 

    Tough One to Swallow from a Compliance Perspective.  To Doug Cornelius, it seems more like a disclosure problem with the hedge funds, receiving reduced rent in exchange for the sending business to UBS.  The Massachusetts regulator found fault with UBS for failing to enforce a requirement that its hedge fund hotel clients disclose the arrangements to their investors. 

For further details, click onto:   [Compliance Building, 12/29]