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UBS, Europe's biggest bank by assets, received a notice from Massachusetts officials demanding documents that show whether the bank created conflicts of interest by leasing office space to hedge funds.
Massachusetts Secretary of State William Galvin is probing UBS' ties with hedge funds to which it provides services, Galvin said yesterday. The state is also looking into relationships between hedge funds and other investment banks, Galvin said, declining to offer specifics.
UBS was leasing hedge funds space and providing them with receptionists, consultants and amenities including coffee at an office tower in Boston, expecting to receive trading business from the funds in return, Galvin said. State officials are also investigating whether the hedge funds are paying higher trading commissions to Zurich-based UBS in exchange for the services and if the funds failed to tell clients about the higher costs, he said. The New York Times reported the probe yesterday.
"Privileges to big players come at the expense of average investors, and we need to make sure there is fairness," Galvin said. "That's the reason for the inquiry."
Galvin issued UBS with a notice in lieu of subpoena, which requires the bank to provide information under oath, said Patrick Ahearn, chief enforcement officer of the Massachusetts Securities Division.
Rohini Pragasam, a UBS spokeswoman based in New York, said the bank was providing information requested by Massachusetts as part of the investigation.
Hedge funds are unregistered pools of capital for wealthy investors and institutions that allow managers to participate significantly in the gain or loss of the money invested. The funds are exempt from many of the disclosure and regulatory requirements binding mutual funds.
Regulators have become increasingly concerned that lax oversight of the US$1.3 trillion ($1.8 trillion) hedge fund industry could put less sophisticated investors at risk.
A US Court of Appeals in Washington rejected rules in June that would subject hedge funds to random inspections by regulators.
The US Securities and Exchange Commission last month proposed to increase the threshold for investing in hedge funds.
The new rules would require individuals to have US$2.5 million in available assets to invest in hedge funds, up from US$1 million currently.
"Hedge funds are supposed to be for sophisticated investors, so their investors aren't as strictly protected by federal regulation," said Tamar Frankel, a professor of corporate law at Boston University.
Hedge funds might be violating so-called "soft-dollar" rules by paying for office space through their trading commissions, Galvin said.
The Securities Exchange Act of 1934 that regulates soft dollars covers all money managers.
Yet hedge funds aren't as strictly regulated on how they allocate trading commissions because they are not bound by the Investment Company Act of 1940, Frankel said.
- BLOOMBERG
