SEC Charged UBS for Unregistered Business

Apart from Allen Stanford, last week USB was in the spotlight. SEC filed an enforcement action against UBS, charging the firm with acting as an unregistered broker-dealer and investment adviser and assisting its cross-border US clients in tax avoidance.

SEC's complaint alleges that UBS's conduct facilitated the ability of certain US clients to maintain undisclosed accounts in Switzerland and other foreign countries, which enabled those clients to avoid paying taxes related to the assets in those accounts. UBS agreed to settle the SEC's charges by consenting to the issuance of a final judgment that permanently enjoins UBS and orders it to disgorge US$200 million. In connection with a related criminal investigation, UBS has entered into a deferred prosecution agreement with the Department of Justice pursuant to which UBS will pay an additional US$180 million in disgorgement, as well as US$400 million in tax-related payments.

From at least 1999 through 2008, UBS acted as an unregistered broker-dealer and investment adviser to thousands of US persons and offshore entities with US citizens as beneficial owners. UBS had at least 11,000 to 14,000 of such clients and held billions of dollars of assets for them. The US cross-border business provided UBS with revenues of US$120 to US$140 million per year.

UBS conducted that cross-border business largely through client advisers located primarily in Switzerland, who were not associated with a registered broker-dealer or investment adviser. These client advisers traveled to the US, on average, two to three times per year on trips that generally varied in duration from one to three weeks. In many instances, the client advisers attended exclusive events such as art shows, yachting events, and sporting events that were often sponsored by UBS, for the purpose of soliciting and communicating with US cross-border clients. UBS also used other US jurisdictional means such as telephones, fax, mail and e-mail to provide securities services to its US cross-border clients.

SEC further alleges that UBS was aware of the requirement for registration with SEC. UBS took action to conceal its use of US jurisdictional means to provide securities services. Among other things, client advisers typically traveled to the US with encrypted laptop computers that they used to provide account-related information, to show marketing materials for securities products, and occasionally to communicate orders for securities transactions to UBS in Switzerland. Client advisers also received training on how to avoid detection by US authorities of their activities in the US.

UBS has been ordered to terminate its US cross-border business and to retain an independent consultant to conduct an examination of its termination of the business. If UBS is further required to disclose the identities of all "secret accounts", this would probably be a disaster for the offshore private banking business in Switzerland.