UBS 'unethical' in mortgage-backed securities pricing

A pencil pointing at the word 'ethic' in a dictionary

An investment arm of UBS failed to follow the investment professional's code of ethics when it mispriced mortgage-backed securities in 2008, according to a director at a global investment advisory organisation.

UBS Global Asset Management (UBSGAM) has paid $300,000 to the US Securities and Exchange Commission (SEC) to settle charges that it misled investors by incorrectly pricing securities in three of its mutual funds in 2008, as discovered by the regulator during the course of an SEC investigation.

All but six of the securities were valued by UBSGAM in excess of their original prices, with the majority being valued "at least 100% higher than the transaction prices", according to the SEC's order.

Michael McMillan, director of ethics and professional standards at the CFA Institute in Virginia, believes such behaviour is unethical in two ways.

"It really has to do firstly with misrepresentation. You're obviously misrepresenting the prices of securities, which is affecting the value of the portfolio as well as the return you're reporting to your clients," he explains.

"The second thing is duty to clients," he continues. "Clients rely on investment professionals to provide them with honest and accurate information."

McMillan sees such errors as being a result of flaws within the pricing process at investment firms.

"The basic point is that – especially when it comes to mortgage-backed securities – investment managers have a lot of discretion in determining the price of these securities, and market prices are not available for them," he says. "So you have to use a model, and other ways, to determine a value for these securities. I think that the more discretion you have in valuing your securities, the greater the potential for unethical behaviour."

UBS has neither admitted nor denied the charges, but pledges to ensure its policies are continually improved.

"UBS Global Asset Management is pleased to have resolved this issue with the SEC," a spokeswoman for the bank said in a statement. "As a matter of course, the firm regularly reviews its procedures in an effort to ensure its valuations and pricing are as accurate as possible."

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