The Securities and Exchange Commission has fined UBS Global Asset Management $300,000 after charging the firm with falsely pricing securities within three of its mutual funds.

The SEC’s enforcement division investigated UBS following a referral from SEC examiners. The assessment revealed that during a two-week period, UBS ignored the mutual funds’ fair valuation procedures in pricing certain illiquid fixed-income securities, in turn misleading investors regarding the net asset values of those funds, the SEC said in a statement.

“UBS Global Asset Management failed to fulfill one of its core delegated responsibilities on behalf of mutual funds it advises – to price securities in the mutual funds accurately,” said Merri Gillette, regional director of the SEC’s Chicago office.

“Fortunately, this misconduct was brought to light quickly, so the duration was short and the harm to investors minimal,” said Gillette.

According to the SEC, UBS purchased approximately 54 complex fixed-income securities in June 2008 - on behalf of the mutual funds - at a total cost of approximately $22 million.

“Most of the securities were part of subordinated tranches of non-agency mortgage-backed securities, the underlying collateral of which generally consisted of mortgages that failed to conform to the requirements necessary for inclusion in mortgage-backed securities guaranteed or issued by Ginnie Mae, Fannie Mae, or Freddie Mac,” the SEC said.

Asset-backed securities and collateralized debt obligations were also part of the aggregate securities purchased.

The SEC’s order established that, subsequent to the purchases, all but six of the securities were valued at prices “substantially in excess of the transaction prices,” many of which were at least 100 per cent higher.

In addition, the valuations were provided by pricing sources which “did not appear to take into account the prices at which the mutual funds had purchased the securities,” the SEC added.  

Moreover, while some of the broker-dealer quotations were based on the previous month-end pricing, others were “stale” and not priced daily.

UBS did not price the securities at “fair value” until a meeting of the firm’s global valuation committee over two weeks after it started receiving “price tolerance reports” which highlighted the price discrepancies. Consequently, the net asset values of the funds were misrepresented by between one cent and 10 cents per share for several days in June 2008; the mutual funds sold, purchased, and redeemed their shares based on inaccurately high net asset values on those days.

The firm, which settled the charges “without admitting or denying the SEC’s findings,” ultimately agreed to be censured and to pay a $300,000 fine. It also consented to a “cease-and-desist” order in light of defying rules 22c-1 and 38a-1 of the Investment Company Act, the SEC said.