Compliance December 18, 2006

Spitzer Says UBS Defrauded Clients Through Brokerage Program

In a lawsuit filed earlier this month, New York Attorney General Eliot Spitzer’s office charges UBS Financial Services, Inc. with leading inappropriate clients into its InsightOne brokerage program by falsely promoting services not offered.
Reported by

According to a December 12, 2006 news release from Spitzer’s office, UBS moved thousands of clients from regular brokerage accounts into InsightOne – a “wrap’ account charging an asset-based fee that the attorney general’s office considers inappropriate for investors who rarely trade securities or hold significant amounts of cash, no-load mutual funds, or other similar assets. UBS lured these clients into the program with false promises, such as the promise of an advice-based account, the news release said.

The lawsuit also charges UBS kept many unsuitable investors in the brokerage program by encouraging brokers to engage in additional trading in their clients’ InsightOne in order to surpass the minimum trading requirement. According to the news release, one broker wrote to a supervisor in an August 2004 e-mail regarding this practice, known as churning, “[N]ow we have to trade heavy or light to stay within guidelines to keep insight one alive …. How Wrong is that? You are not looking at the best interest of the client. CONFLICT is all over this.” Another broker explained in an e-mail to a senior manager in October 2003 that “increasing transactions for the sake of increasing transactions (not for the benefit of the client) is called churning.”

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In addition, Spitzer’s office said UBS created a conflict of interest for its brokers by giving them a financial incentive to enroll and keep investors in InsightOne even when the program was ill-suited for those investors.

The news release said InsightOne customers paid tens of millions of dollars more in fees than they would have paid in traditional brokerage accounts as a result of UBS’ fraudulent conduct. The release included several examples of clients who paid exorbitant fees, including a 91-year old customer charged more than $35,000 for just four trades over two years – around $33,000 more than she would have paid in a traditional brokerage account.

The lawsuit charges UBS with violations of state anti-fraud laws, common law fraud and breaches of fiduciary duty, and seeks from UBS disgorgement, damages and restitution, and injunctive relief.

Products December 15, 2006

Vanguard to Offer ETF Shares for New FTSE Index Fund

The Vanguard Group will offer ETF shares for its new FTSE All-World ex USA Index Fund, which is expected to be available in the first quarter of 2007, the investment company has announced.
Reported by

A Vanguard news release said the fund will seek to track the performance of the FTSE All-World ex USA Index, a float-adjusted, market-capitalization-weighted index designed to measure the performance of developed and emerging markets outside the United States.

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The fund will invest in a broadly diversified sampling of the target benchmark, which comprises more than 2,000 large- and mid-cap stocks of companies in 48 foreign countries, according to the announcement.The offering will also feature Institutional and Investor Shares.

Vanguard began offering ETFs in 2001 and now manages more than $20 billion in exchange-traded fund assets, according to the company. The firm features 27 ETF products, including four launched in 2006:

  • Vanguard Dividend Appreciation ETF,

  • Vanguard Mid-Cap Value ETF,

  • Vanguard Mid-Cap Growth ETF, and

  • Vanguard High Dividend Yield ETF.

All Vanguard ETFs trade on the American Stock Exchange.

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