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FINRA Slaps UBS With $2M Fine for Repeat Muni Violations

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UBS bank entrance sign (Photo: AP)

UBS Financial Services was censured and fined $2 million Wednesday by the Financial Industry Regulatory Authority for repeated failures to timely address municipal short positions and inaccurately representing the tax status of thousands of interest payments to customers.

From August 2015, when FINRA previously sanctioned UBS for similar violations, through the end of 2017, UBS continued to fail to timely identify and properly address certain short positions in municipal securities.

As a result, “UBS inaccurately represented on customer account statements and Forms 1099 that interest payments for 2,853 positions in municipal securities were tax-exempt when, in fact, they were taxable,” FINRA said. UBS also “inaccurately represented on approximately 950 additional customer account statements and Forms 1099 that interest payments were taxable, when they were tax-exempt,” according to FINRA.

FINRA also required UBS to pay restitution to customers who may have incurred any increased state tax liabilities, to pay the IRS to relieve customers of any additional federal income tax owed, and to certify within 90 days that the firm has taken appropriate corrective measures.

In settling the matter, UBS neither admitted nor denied the charges, but consented to the entry of FINRA’s findings. FINRA allocated $1.75 million of the $2 million fine to the Municipal Securities Rulemaking Board violations.

As FINRA explains, investors often purchase municipal securities because of the tax-exempt interest earned on those investments. However, when a FINRA member firm is short municipal securities purchased by customers, the firm — not the issuing municipality — is the source of the interest payments. That interest, commonly known as “substitute interest,” is subject to applicable taxes.

“FINRA member firms must be attentive to municipal short positions that impact customer accounts, and it is critical that member firms convey accurate information to customers regarding their account holdings,” said Jessica Hopper, senior vice president and acting head of FINRA enforcement. “In addition, member firms are expected to take prompt corrective action after being sanctioned and avoid repeat violations.”

— Check out FINRA Points Out Common Mistakes for Firms to Avoid on ThinkAdvisor.