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UBS Securities LLC and UBS Financial Services, Inc. Agree in Principle to Auction Rate Securities Settlement

Firm Will Provide Liquidity and Remediate Losses


Washington, D.C., Aug. 8, 2008 — The Securities and Exchange Commission’s Division of Enforcement today announced a preliminary settlement in principle with UBS Securities LLC and UBS Financial Services, Inc. (collectively, UBS) including proposed charges and a plan that would restore approximately $22 billion in liquidity to its customers who invested in auction rate securities (ARS). This plan includes approximately $8.2 billion for individual investors, small businesses, and charitable organizations, $3.3 billion for holders of tax-exempt Auction Preferred Shares (subject to regulatory review), and $10.3 billion for institutional investors.

The ARS market collapsed in mid-February 2008, leaving over 40,000 UBS customers holding these illiquid securities indefinitely. The conduct underlying the proposed charges stems from UBS’s marketing of auction rate securities as cash alternatives. However, the liquidity of these securities was premised on UBS providing support bids for auctions it managed when there was not enough customer demand, but this was not adequately disclosed to customers. When UBS stopped supporting auctions in February 2008, it led to widespread auction failures for UBS customers.

Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement, said, “The Division’s agreement in principle with UBS, if approved by the Commission, will quickly restore liquidity to tens of thousands of UBS investors. In a short time, approximately 31,300 individual, charitable, and small business investor accounts will receive more than $8.2 billion in liquidity, and approximately 9,200 investor accounts holding tax-exempt Auction Preferred Shares will receive nearly $3.3 billion in liquidity. UBS also will begin the process of restoring $10.3 billion in liquidity to approximately 1,000 institutional investor accounts.”

The terms of the agreement in principle, which are subject to finalization, review and approval by the Commission, provide:

  • UBS will be permanently enjoined from violating the provisions of Section 15(c) of the Securities Exchange Act of 1934, and Rule 15c1-2 thereunder, which prohibit the use of manipulative or deceptive devices by broker-dealers.
  • No later than Oct. 31, 2008, UBS will offer to liquidate at par all ARS from individual investors and charitable organizations who have less than $1,000,000 in funds on deposit at UBS.
  • No later than Oct. 31, 2008, subject to regulatory approval, UBS will proceed with its plan for the repurchase of tax-exempt Auction Preferred Shares held by all UBS investors.
  • No later than Jan. 2, 2009, UBS will offer to liquidate at par all ARS from all other UBS individual investors and charitable organizations as well as from small business investors with account and household values up to $10,000,000.
  • UBS will use its best efforts to offer to liquidate at par ARS from its institutional customers by the end of 2009. However, by no later than June 30, 2010, UBS will offer to liquidate at par all ARS held by institutional customers.
  • UBS will make whole by Sept. 15, 2008, any losses sustained by the customers described above who sold ARS after Feb. 13, 2008.
  • Until UBS actually provides for the liquidation of the securities on the schedule set forth above, UBS will provide customers no-cost loans that will remain outstanding until the ARS are repurchased.
  • To the extent that the customers described above have incurred consequential damages beyond the loss of liquidity in the customer’s holdings of ARS (which should be restored pursuant to the settlement terms above), UBS will participate in a special arbitration process that the customer may elect, and that will be overseen by the Financial Industry Regulatory Authority (FINRA), whereby UBS will not contest liability for its misrepresentations and omissions concerning the ARS, but may challenge the existence or amount of any consequential damages. The arbitration claim will be heard by a single, non-industry arbitrator.
  • This arbitration process will be voluntary on the part of the customer and if a customer elects not to take advantage of these special procedures, a customer may pursue all other arbitration or legal or equitable remedies available through any other administrative or judicial process available to the customer.
  • UBS will not liquidate its own inventory of a particular ARS before it liquidates its customers’ holding in that security.
  • UBS will provide notice to all customers of the settlement terms.
  • UBS will establish a telephone assistance line, with appropriate staffing, to respond to questions from customers concerning the terms of the settlement.
  • UBS faces the prospect of a financial penalty to the SEC after it has completed its obligations under the settlement agreement. Determinations as to the amount of the penalty, if any, will take into account, among other things, an assessment of whether UBS has satisfactorily completed its obligations under the settlement, and the costs incurred by UBS in meeting those obligations, including penalties incurred and the cost of remediation.

The Commission notes the substantial assistance and cooperation from the New York Attorney General, FINRA, and the North American Securities Administrators Association.

The Commission’s investigation is continuing as to individuals and other entities that participate in the auction rate securities market.

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Fredric Firestone (202) 551-4711
Kenneth R. Lench (202) 551-4938



Modified: 08/08/2008