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UBS Pays $23 Million to Settle NY Charges It Misled Clients

Largest Settlement Ever Involving Fee-Based Brokerage Accounts

July 16, 2007

Under the terms of the settlement, UBS, one of the world's largest private wealth managers, will reimburse customers $21.3 million and pay a $2 million penalty for inappropriately steering customers into the fee-based accounts of its InsightOne brokerage program.

“UBS convinced customers to rely on its advice and then abused that trust,” said New York Attorney General Andrew Cuomo. “This major settlement is a win for customers inappropriately pushed into unsuitable brokerage accounts and a warning to the entire industry that customers’ interests must come first.”

The settlement was reached after the Attorney General’s investigation led to a lawsuit that asserted UBS placed thousands of traditional brokerage customers to InsightOne accounts, falsely promising comprehensive and sophisticated financial planning services.

Additionally, the complaint alleged UBS was fully aware that InsightOne would be inappropriate and more costly for traditional brokerage customers who made few trades per year.

The company had a legal obligation to keep these customers out of the program. Instead, UBS financially incentivized brokers to switch customers into accounts regardless of whether the accounts fit their needs, and then charged customers millions of dollars in unnecessary fees.

In fee-based accounts such as InsightOne, a customer is charged an annual fee that is a percentage of the assets in the account, instead of a per-transaction commission as in a traditional brokerage account. As a result, customers making only a few trades a year and enrolled in fee-based accounts end up paying significantly higher costs. For example:

• UBS charged a 91-year-old InsightOne client more than $35,000 for just four trades over two years (approximately $8,800 per trade). This was approximately $33,000 more than the same investor would have paid in a traditional brokerage account.

• An 82-year-old account holder paid approximately $24,000 in InsightOne fees in 2003 while executing only one transaction.

• A retiree paid a fee of $1,250 in 2003 – more than 10% of her annual income of $11,000 – despite having traded only twice during the year.

• A farming couple made two trades over three years in InsightOne and were charged more than $23,000 per trade, paying some $46,000 more than they would have paid in a traditional account. These fees represented more than 20% of the couple’s annual income.

Additionally, the lawsuit asserted that UBS failed to responsibly prescreen customers before recommending unsuitable InsightOne accounts. The lawsuit, filed in New York County Supreme Court, in December 2006, charged UBS with violations of state anti-fraud laws, common law fraud and breaches of fiduciary duty.

Advice for Investors

The Attorney General’s office also released useful tips to help investors protect themselves when seeking financial advice:

• Impressive titles may be misleading. Watch out for marketers using impressive sounding titles that may sound similar to a Registered Investment Advisor. Such titles may be an effort to mislead you about their qualifications.

• Know the difference. Brokers are not investment advisors. A broker’s primary function is to help you trade stocks or other securities. If a broker claims to be a “financial advisor,” it does not make him or her an investment advisor. An investment advisor is qualified to give you financial planning advice such as retirement and estate planning.

• Brokers are held to different standards than investment advisors. Under state and federal law, generally, brokers are required to sell or execute investments suitable to your needs. Investment advisors, however, have a legal duty to give you financial advice solely in your best interests and in all aspects of the business relationship.

• Registration requirements apply to both. Ask the broker or investment advisor upfront if he or she is licensed or registered before making an investment. When a broker or advisor is not registered or licensed, that is a sure sign something is wrong. Remember, brokers are regulated by the National Association of Securities Dealers and investment advisors must register with the Securities and Exchange Commission. Both must also register with the New York State Attorney General’s Office.

• Comparison Shop before making a decision. When you are making decision as important as choosing your broker or investment advisor, comparison shop before opening an account. Brokerage and investment advisor fees vary and may be negotiable. Ask what services you are getting, what you are paying for, and whether you will be paying a commission, or a fee based on your assets, or both.

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