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Retirement Planning > Social Security

UBS Reaches ARS Deal with States (Aug. 8, 2008)

By Janet Levaux

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UBS says it reached a settlement, in principle, with the New York Attorney General, the Massachusetts Securities Division, the Securities and Exchange Commission (SEC) and other state regulatory agencies represented by North American Securities Administrators Association (NASAA) to restore liquidity to all remaining clients’ holdings of auction rate securities (ARS).

Under this August 8 deal, UBS will re-purchase $8.3 billion of ARS, at par, from most private clients during a two-year time period beginning January 1, 2009. Private clients and charities with less than $1 million in household assets at UBS will have access to some funds starting October 31, 2008. From mid-September, UBS will provide loans at no cost to the client for the par value of their ARS holdings.

N.Y. Attorney General Cuomo says the deal has an $11 billion target for funds to be returned to investors. UBS is also paying some $75 million in fines to New York and another $75 million to an investor-protection organization, according to Cuomo’s office.

The agreement with UBS comes just one day after Cuomo settled similar allegations against Citigroup. According to his office, “The two settlements together provide relief to approximately 80,000 investors who were left holding nearly $20 billion worth of securities they could not sell after the widespread failure of the auction rate securities market this past February.”

Merrill Lynch, also under investigation by the attorney general, has announced a voluntary buy-back of illiquid ARS from its retail investors. But that apparently isn’t enough for the A.G.

“While this offer represents a welcome change in approach in response to the Attorney General’s efforts to make investors’ whole, Merrill Lynch’s buy-back program fails to contain certain investor protection safeguards that are part of the UBS and Citigroup programs and is under further review by the Attorney General,” his office says in a statement .

UBS, Cuomo’s office says, also agrees to:

Fully reimburse all retail investors who sold their auction rate securities at a discount after the market failed

Consent to a special, public arbitration procedure to resolve claims of consequential damages suffered by retail investors as a result of not being able to access their funds

Undertake to expeditiously provide liquidity solutions to all other institutional investors

Reimburse all refinancing fees to any New York State municipal issuers who issued auction rate securities through UBS since August 1, 2007.

As part of the settlement, UBS will pay to the State of New York a civil penalty in the amount of $75 million and a separate civil penalty of $75 million to the North American Securities Administrators Association (“NASAA”), whose ARS Task Force has been conducting its own series of investigations into the marketing and sale of auction rate securities by broker-dealer firms.

UBS’ stock is trading near $21, down sharply from its one-year high of $58.

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