Finra censures, fines UBS $2 million over muni improprieties

Regulator says firm inaccuarately represented tax status of interest payments to clients

Oct 2, 2019 @ 1:06 pm

By InvestmentNews

The Financial Industry Regulatory Authority Inc. has censured and fined UBS Financial Services $2 million for "repeated failures" in addressing municipal short positions in a timely way and for inaccurately representing the tax status of thousands of interest payments to customers.

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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.

Finra previously sanctioned UBS for its failures in this area in August 2015.

Explaining the firm's conduct in a release, Finra said that when a brokerage 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.

[More: Morgan Stanley fined $225,000 over questionable muni bond trades]

Finra found that from the time of its last sanction against the firm in this area, in August 2015 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, and inaccurately represented on approximately 950 additional customer account statements and Forms 1099 that interest payments were taxable, when they were tax-exempt.

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These failures, Finra said in a release, were the result of the firm's "continued failure to establish reasonably designed supervisory systems and written supervisory procedures to timely identify short positions in municipal securities and its failure to provide reasonable guidance to its registered representatives instructing them how to address the short positions."

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