Compliance August 8, 2008

The Bill Gets Bigger for UBS

UBS today announced a comprehensive settlement, in principle, for all clients holding auction-rate securities (ARS), for an estimated cost of $900 million.
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The agreement settles charges by the New York Attorney General (NYAG), the Massachusetts Securities Division, the Securities and Exchange Commission (SEC), and other state regulatory agencies represented by North American Securities Administrators Association (NASAA).

UBS committed to provide liquidity solutions to institutional investors and will agree from June 2010 to purchase all or any of the remaining $10.3 billion, at par, from its institutional clients, the company said. In July, UBS announced it would buy back as much as $3.5 billion of ARS preferred shares issued by tax-exempt closed-end funds managed by firms such as BlackRock Inc. and Nuveen Investments Inc., not including auction-rate debt from municipalities or student-loan providers (see UBS Plans to Buy Back Auction-Rate Securities).

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In May, UBS Financial Services Inc. reached an agreement with Massachusetts Attorney General Martha Coakley to return $37 million to 17 cities and towns, as well as to the Massachusetts Turnpike Authority, for allegedly misleading them about the investments (see UBS Agrees to Repay Investors of Risky Securities).

Under the agreement, in principle, UBS has committed to purchase a total of $8.3 billion of ARS, at par, from most private clients during a two-year time period beginning January 1, 2009. According to the UBS announcement, private clients and charities holding less than $1 million in household assets at UBS will be able to avail themselves of this relief beginning Oct. 31, 2008. From mid-September, UBS will provide loans at no cost to the client for the par value of their ARS holdings.

The firm also agreed to pay a fine of $150 million to $75 million to the state of New York and $75 million to other state regulatory agencies. UBS neither admits nor denies allegations of wrongdoing.

Massachusetts securities regulator William Galvin in June (see UBS Securities Faces Charges of Fraud by Mass. Authority) and New York Attorney General Andrew Cuomo in July (see NY Next to Target UBS) filed suits alleging the Zurich-based bank committed fraud, misleading investors by its marketing of the long-term securities as money market-like instruments that were easy to buy and sell, and that it continued selling the debt even as the market unraveled and top bank executives unloaded $21 million in personal auction-rate holdings.

Afterwards, the bank suspended its head of fixed income in the U.S. and global head of municipal securities, David Shulman (see UBS Benches Fixed Income Head Amid Auction-Rate Probes).

The Massachusetts Secretary of the Commonwealth then charged Merrill Lynch & Co. with fraud over charges it marketed auction-rate securities while not accurately disclosing the potential market risks (see Massachusetts Charges Merrill with Fraud over ARS Sales).

In Practice August 8, 2008

Some Sponsors Aren’t Fee Sure

Nearly one-fourth of plan sponsors surveyed by Mercer express a lack of confidence that fees associated with their 401(k) plans have been properly disclosed.
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Among the 150 defined contribution plan sponsors surveyed, 23% said they are not fully confident that investment fees and administrative costs have been properly disclosed, and 25% said their plan vendors have not yet disclosed the amount of annual revenue received from their plan’s investment managers to pay for administrative services, according to a Mercer press release.

The survey also found more employers have implemented formal fee monitoring and benchmarking. Among employers that have benchmarked administrative fees, 68% did so within the past 12 months.

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The press release said nearly three-fourths (71%) of the employers surveyed indicated revenue sharing is paid directly to vendors, while 44% reported they pay no explicit administrative fees. Participants are likely to cover the cost when explicit administration fees are charged (47%), and transaction fees are most often charged for loan initiation (74%) and loan maintenance (39%).


Last month, the U.S. Department of Labor unveiled the final portion of its three-part plan disclosures regulatory package that calls for sponsors of employee-directed plans to supply participants with basic plan information including investment returns and expenses (see EBSA Issues New Participant Disclosure Regulations).

“Plan administrators have been formalizing fee monitoring and benchmarking in anticipation of federal requirements around disclosures, as well as in response to the rash of lawsuits initiated on behalf of plan participants,” said Amy Reynolds, a Mercer principal and defined-contribution retirement plan consultant, in the release.


Among survey respondents, 51% had 5,000 or more participants and 36% had from 1,000 to 5,000 participants. More than one third (35%) had assets over $500 million and 31% had assets between $100 million and $500 million.

 

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