Compliance November 12, 2018

UBS Sued Over Alleged RMBS Misrepresentations

UBS says it intends to rely on certain facts to defend itself; for one, that it suffered massive losses on U.S. mortgage-related assets, including the residential mortgage-backed securities (RMBS) cited in the complaint, negating any inference of fraud.

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The U.S. Justice Department filed a civil complaint against UBS AG and several of its United States affiliates, alleging that UBS defrauded investors throughout the United States and the world in connection with its sale of residential mortgage-backed securities (RMBS) from 2006 through 2007.

RMBS’ are often used by defined benefit (DB) plan sponsors in their portfolios.

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As detailed in the complaint, from 2006 through 2007, UBS misled investors about the quality of billions of dollars in subprime and Alt-A mortgage loans backing 40 RMBS deals. Specifically, the complaint alleges, in publicly-filed offering documents, UBS knowingly misrepresented key characteristics of the loans, thereby concealing the fact that the loans were much riskier and much more likely to default than UBS represented. Ultimately, the 40 RMBS sustained catastrophic losses. 

“The complaint alleges that instead of ensuring that their representations to investors were accurate and transparent, UBS affirmatively misled investors and withheld crucial information from them about the loans in its deals,” stated United States Attorney Byung J. Pak in an announcement.  “UBS allegedly placed a higher priority on selling bonds and making profits than accurately representing the quality of the underlying loans to investors.  These practices resulted in massive losses to investors, harmed homeowners, and ultimately jeopardized the banking system.”

However, UBS has fired back, saying the Justice Department’s claims are not supported by the facts or the law.

UBS says it intends to rely on certain facts to defend itself; for one, that it suffered massive losses on U.S. mortgage-related assets, including the RMBS cited in the complaint, negating any inference of fraud. UBS says it was not a significant originator of U.S residential mortgages; it fulfilled its obligations to sophisticated RMBS investors; any penalty sought by the Justice Department would be limited, at most, to losses to federally insured financial institutions; and the alleged misrepresentations did not cause RMBS investor losses.

More details of UBS’ intended defense can be found in this announcement.
Data & Research November 12, 2018

Quality of Investments for HSAs Has Improved

Investment menu designs have also gotten better, according to a Morningstar analysis.

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Morningstar found that the quality of investment options has improved across health savings accounts (HSAs), but high fees and low transparency remain hurdles.

In its second annual study assessing plans from 10 of the largest HSA plan providers, Morningstar assessed each plan as both an investing vehicle and spending vehicle. When evaluating HSAs as a spending vehicle, Morningstar considered three main components: maintenance fees, additional fees and the interest rates offered on investors’ checking accounts. When assessing the merits as investment vehicles, it considered investment menu design; quality of investments; price; investment threshold, or the amount investors must keep in the account before investing; and performance.

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Morningstar found that the quality of investments across the 10 largest HSA plans remains strong and has improved since last year, with at least half of each plan’s investment options earning Morningstar Analyst Ratings of Gold, Silver or Bronze. Investment menu designs have also gotten better, with several plans taking steps to reduce menu overlap or add core investment options. Still, a number of plans haven’t made the same improvements to their investment choices and many suffer from high fees, explaining why only three receive Positive assessments as an investing vehicle, and just one earns a Positive assessment as a spending vehicle.

Fees vary significantly across plans, and most require individuals to keep money in the account before they can invest. Fees remain elevated. Across the 10 plans, the average cost for passive funds ranges from roughly 0.30% to 0.75% per year, and the average for active funds from about 0.80% to 1.20%. Eight of the 10 plans require investors to keep $1,000 or $2,000 in the account before they can invest, which can create an opportunity cost.

Transparency remains poor, according to the analysis. Only four of the 10 plans evaluated disclose relevant fees, interest rates and investment lineups on their websites, and call centers often struggle to provide this basic information.

From its analysis, Morningstar offered tips for best practices. HSAs as spending vehicles should avoid account maintenance fees, limit additional fees, offer reasonable interest on deposits and provide FDIC insurance. HSAs as investing vehicles should charge low fees for both active and passive exposure, offer strong investment strategies in all core asset classes while limiting overlap among options and allow first dollar investing (by not requiring money to remain in the account before investing).

“Thanks to increased use of high-deductible health insurance plans, which are often paired with an HSA, and unrivaled tax advantages, HSA plans are more popular than ever,” says Leo Acheson, associate director of multi-asset and alternative strategies team at Morningstar. “We’re encouraged by the improvement in the quality of HSA investment options since last year, but the industry can raise its game by providing greater transparency on fees, investment options, and interest rates and further reducing high plan expenses.”

Morningstar’s report on its analysis may be downloaded from here.

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