Administration April 4, 2002

UBS PaineWebber Settles Fee Dispute

April 4, 2002 (PLANSPONSOR.com) - UBS PaineWebber will pay $10.3 million to the City of Nashville to settle a dispute over the amount of the firm's fees as exclusive investment consultant to Nashville's pension fund.

Reported by

Fred Schneyer

Government officials had also complained that UBS PaineWebber understated the risks of the investments it recommended and misled them about its recommended investment strategies. The fund ended its relationship with PaineWebber in 2000.

The cornerstone of the deal – that PaineWebber would be paid based on the number of portfolio trades – became a key part of the dispute. Many in the investment community charge that such a compensation arrangement gives an advisor too great an incentive to advise unnecessarily frequent trades.

The lion’s share of the settlement will go to the $1.4 billion fund, which covers city employees. The remainder will pay legal fees.

“We felt they were overcompensated, we felt the agreements were not clear, and we thought we could have gotten a better deal,” said Karl Dean, director of law at the legal department of the Metropolitan Government of Nashville and Davidson County, Tennessee.

Fund Made Money

Nashville officials may have had problems with PaineWebber’s fees and some of its consulting, but the fact remains that the city’s pension fund made money with PaineWebber’s advice. For the five years ended December 1999, for example, the fund had an average annual gain of 18.47%.

But a KPMG April 200 audit maintained that PaineWebber’s fee arrangement was poisoned with potential conflicts and built up too many trading commissions. The audit also concluded that PaineWebber had misrepresented the consequences of some of its advice.

Criticism

Because of the fund’s unusual fee and commission arrangement, PaineWebber earned excessively high fees on its trades, KPMG concluded. For the year ended June 30, 1999, consulting fees were $788,747, compared with fees for similar public funds of $92,000 to $163,000 in 1998.

PaineWebber also kept the pension fund in the dark about its individual managers’ returns and risks in the portfolio, according to the KPMG review.

A PaineWebber spokesman said: “The Nashville Metro Board pension fund had an outstanding record of performance while UBS PaineWebber was a consultant to the fund. UBS PaineWebber strongly disagrees with the one-sided criticisms and conclusions in the KPMG report. Although we believe that our compensation was reasonable, we decided to resolve this matter amicably.”