NYSE Regulation announced that it has censured and fined UBS Financial Services Inc. a total of US$49.5 million for failure to supervise deceptive market-timing activities engaged in by brokers, failure to establish appropriate procedures for supervision and control, and failure to maintain adequate books and records.

The firm consented to the sanction, but neither admitted nor denied the allegations. The agreement comes as part of a joint matter brought with the New Jersey Bureau of Securities, and half of the penalty is payable to the state of New Jersey.

Of the remaining US$24.75 million, NYSE Regulation says that US$18 million shall be placed in a fund to compensate injured customers who, during the relevant period, invested long-term in the same mutual funds that were the subject of market-timing; a US$5.75 million penalty will be paid to the NYSE; and credit was given for US$1 million being separately paid to the state of Connecticut as part payment in a matter relating to improper market-timing. Any remaining amount in the fund after compensating UBS customers will then be distributed to other investors who were not UBS customers but who invested in these affected mutual funds. Any unused portion will revert to NYSE Regulation after three years.

“When a brokerage firm permits a hedge fund or any other market participant to trade deceptively and gain an unfair advantage over other investors, it has violated the trust that forms the foundation of our capital markets,” said Richard Ketchum, chief regulatory officer for the NYSE. “UBS’s failure to have adequate controls in place led to this unfortunate occurrence.”

The NYSE said that beginning January 2000 and continuing through December 2002, brokers in at least seven UBS branch offices engaged in deceptive market-timing to benefit their customers, typically hedge funds, to the detriment of the affected mutual funds and their non-market-timing shareholders. The brokers used deceptive trading practices to conceal their identities, and those of their customers, to enable them to trade in mutual funds that sought to limit or curtail their market-timing.

UBS also agreed to retain an outside law firm to review its procedures relating to supervision and the maintenance of books and records, and to have that report submitted to NYSE Regulation and the firm’s board of directors.