European Bank Investigated for Leasing to Hedge Funds
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UBS AG, 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’s ties with hedge funds to which it provides services, Mr. Galvin said in an interview yesterday. The state is also looking into relationships between hedge funds and other investment banks, Mr. Galvin said, declining to offer specifics.
UBS is 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, Mr. Galvin said. State official 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,” Mr. Galvin said. “That’s the reason for the inquiry.”
Galvin issued UBS a notice in lieu of subpoena, which requires the bank to provide information under oath, the chief enforcement officer of the Massachusetts Securities Division, Patrick Ahearn, said.
Rohini Pragasam, a UBS spokeswoman based in New York, said the bank is providing information requested by Massachusetts as part of the investigation. She declined to comment on the specifics of the probe.
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 $1.3 trillion hedge fund industry could put less sophisticated investors at risk. A U.S. Court of Appeals in Washington rejected rules in June that would subject hedge funds to random inspections by regulators.
The U.S. Securities and Exchange Commission last month proposed to increase the threshold for investing in hedge funds.
