The SEC today charged an investment advisory arm of UBS with failing to properly price securities in 3 mutual funds that it manages, resulting in misstatements of those funds' net asset values (NAVs).  The misconduct was revealed during an SEC examination, which minimized investor harm. SEC Enforcement began investigating UBS Global Asset Management, a RIA (SEC-registered investment adviser) following a referral from SEC examiners who had conducted a routine exam of the firm.  The SEC's investigation found that certain illiquid fixed-income securities in the portfolios of the mutual funds had not been priced correctly over a 2-week period.  The error allegedly resulted from UBSGAM not following the mutual funds’ fair valuation procedures in pricing . SEC Findings and Allegations. The firm purchased on behalf of the mutual funds approximately 54 complex fixed-income securities in June 2008 at an aggregate purchase price of approximately $22 million.  Most of the securities were part of subordinated tranches of non-agency MBS's (mortgage-backed securities) whose underlying collateral generally consisted of mortgages that didn't conform to the requirements necessary for inclusion in MBS's guaranteed or issued by Ginnie Mae, Fannie Mae, or Freddie Mac.  The securities purchased also included ABS's (asset-backed securities) and CDO's (collateralized debt obligations). Following the purchases, all but 6 of the securities were then valued at prices substantially in excess of the transaction prices, including many at least 100% higher. The valuations used by UBSGAM were provided by pricing sources - i.e., B/D's or a 3rd-party pricing service - that did not appear to take into account the prices at which the mutual funds had purchased the securities.  Some of the B/D quotations were based on the previous month-end pricing, while other quotes were stale and not priced daily. UBSGAM allegedly did not price the securities at fair value until it held a meeting of the firm’s Global Valuation Committee, more than 2 weeks after UBSGAM began receiving “price tolerance reports” identifying the discrepancies between the purchase prices and the valuation of the securities based on the pricing sources.  By using the valuations provided by B/D's or a 3rd-party pricing service instead of the transaction prices, UBSGAM caused the mutual funds to not follow their own written valuation procedures.

These procedures required the securities to be valued at the transaction price until UBSGAM received a response to a price challenge based on the discrepancy identified in the price tolerance report, or UBSGAM made a fair value determination. The procedures provided that the transaction price could be used for up to 5 business days until a decision needed to be made to determine the fair value.  By failing to implement these procedures, UBSGAM aided and abetted and caused the funds to violate Rule 38a-1 under the Investment Company Act.

The errors caused the NAVs of the funds to be misstated between 1 - 1- cents per share for several days in June 2008.  Consequently, the mutual funds sold, purchased, and redeemed their shares based on inaccurately high NAVs on those days.  UBSGAM thus aided and abetted and caused the funds to violate Rule 22c-1 adopted pursuant to Section 22(c) of the Investment Company Act. SEC Sanction. UBSGAM agreed to pay $300,000 to settle the SEC’s charges.  The SEC acknowledges the assistance and cooperation of UBSGAM during the examination and investigation. SEC Chicago Regional Office Staff Credits. Investigation conducted by:  Jamie Davidson, Marlene Key, Steven Levine, Eric Phillips.  SEC examination team that referred the matter included:  Maureen Dempsey, Matthew Harris, Leora Hughes, Stanton Nelson, Susan Weis.   For further details, go to:   [SEC PR 12-8, 1/17/12]   and   [SEC Order Against UBSGAM]