The Financial Institutions Regulatory Authority fined a UBS unit $750,000 for mistakenly reporting customers’ municipal-bond-account interest was tax-exempt, when the firm’s handling of the trades made it taxable instead. Because the brokerage itself paid over 4000 customers about $1.2 million in interest, the payments weren’t tax exempt; to qualify, the interest must be paid directly by a municipal issuer. Instead, the firm had used the customers’ long positions in those bonds to cover the firm’s short positions and so made substitute interest payments.
FINRA’s AWC stated: “The Firm failed to consider – and its automated system that calculated the interest owed to customers did not take into account – whether the interest it paid to customers should be coded as non-taxable when the interest was paid by the Firm rather than the municipal issuer.” FINRA cited the firm for violations of MSRB Rule G-27 regarding supervision and compliance, along with fair-dealing and record-keeping rules. The conduct occurred between 2009 and 2013. UBS settled the FINRA charges without admitting or denying liability.
FINRA issued a warning on the issue in late July. We covered its Regulatory Notice 15-27 here.