Proprietary Matters for AEFA and UBS

Aug 23, 2005 9:03 PM, By John Churchill

Selling proprietary product via a firm’s own sales force was once considered a great strategy for maximizing revenue. In another sign that that strategy is dead (as if you needed one): UBS and Ameriprise are now embroiled in separate class-actions suits.

Like other firms accused of the same thing, the plaintiffs allege that firms should have fully disclosed the incentives advisors were given to sell in-house financial products. Morgan Stanley and Edward Jones, to name two others, also have come under fire for not disclosing the behind-the-scenes payments that influenced what products got recommended to clients. Jones paid $75 million last year in a settlement with the NASD over undisclosed revenue-sharing arrangements, and Morgan Stanley paid $50 million in a 2003 settlement with the SEC for a similar arrangement that went undisclosed. Still, observers say, the industry remains in a very vulnerable position with the UBS and Ameriprise suits.

“God forbid these cases go to trial, because I think it will be ugly,” says Bill Singer, a New York-based securities attorney who also writes a column for Registered Rep. “Proprietary products are like this rabid animal the Street has kept secret.” The UBS class-action suit, filed on July 29, in the Southern District of New York against the firm and its affiliated entities, alleges that between May 1, 2000 and April 30, 2005 the firm “aggressively” pushed advisors to sell its proprietary and tier I funds [its favored third-party managers who paid for “shelf space”], “even though such investments were not in the clients’ best interest.” The action is pending in court. One plaintiff firm, Stull Stull & Brody was unavailable for comment.

“This lawsuit is just the latest in a string of claims filed against broker/dealers and mutual fund companies,” says a spokesperson for UBS. “UBS is confident that its practices and disclosures are appropriate. The suit is without merit, and UBS will defend itself vigorously.” The complaint alleges that UBS’ sales practices “created an insurmountable conflict of interest by providing substantial monetary incentives” to sell UBS funds and “shelf-space” funds, which include several fund families the firm had revenue-sharing agreements with. “UBS’ failure to disclose the incentives constituted violations of federal securities laws,” says the complaint release.

Meanwhile, Ameriprise (formerly known as American Express Financial Advisors), fresh off a $7.4 million settlement regarding undisclosed conflicts of interest in mutual fund sales with the state of New Hampshire, is battling two ongoing class actions that make similar allegations (one filed in New York in March 2004, is still in preliminary stages; another was filed in Arizona in November 2002.) In the latter case, AEFA’s efforts to dismiss have been blocked and the firm was served with a motion on Aug. 1 asking the Federal Court in Arizona to certify a class of more than 500,000 former AEFA clients. (The motion is expected to be heard in the fall, according to the release.)

Carolyn Anderson, a securities attorney with Zimmerman Reed in Minneapolis, says the case focuses a very important omission: “If you’re an investment advisor, you’re required by law to disclose any conflicts of interest—AEFA advisors didn’t do that,” she says. David Kanihan, vice president media relations at Ameriprise, had this to say about the case: “We believe there are substantial factual and legal weaknesses in their case, and we’ll continue to defend ourselves vigorously.”