Regulation and supervision

As a Swiss-registered company, UBS's home country regulator is the Swiss Financial Market Supervisory Authority (FINMA). However, UBS's operations are global and are therefore regulated and supervised by the relevant authorities in each of the jurisdictions in which it conducts business. This section describes the regulation and supervision of UBS's business in Switzerland, the firm's home market. The regulatory and supervisory environments in the US and the UK, UBS's next two largest areas of operations, are also discussed.

Regulation and supervision in Switzerland

FINMA, the successor organization of the Swiss Federal Banking Commission (SFBC), commenced operations on 1 January 2009. On that date, the Federal Act on the Swiss Financial Market Supervisory Authority, which the Swiss Parliament approved on 22 June 2007, went into full legal force. The effect of the Act is to merge three bodies - the Swiss Federal Banking Commission (SFBC), the Federal Office of Private Insurance, and the Anti-Money Laundering Control Authority - into FINMA. In addition to a new organizational framework which will also impact supervisory activity, the Act streamlines and harmonizes the sanctions regime applicable to financial institutions.

Swiss federal legislation

The legislation most relevant to UBS is that enacted by the Swiss Parliament and the Swiss Federal Council.

In this respect, UBS is regulated by the Swiss Federal Law relating to Banks and Savings Banks of 8 November 1934, as amended, and the related Implementing Ordinance of 17 May 1972, as amended, which are together known as the Federal Banking Law. Depending on the license obtained under this law, banks in Switzerland may engage in a full range of financial services activities, including commercial banking, investment banking and asset management. Banking groups may also engage in insurance activities, but these must be undertaken through a separate subsidiary. The Federal Banking Law establishes a framework for supervision by FINMA.

Switzerland implemented the internationally agreed capital adequacy rules of the Basel Capital Accord (Basel II) by means of the Capital Adequacy Ordinance of 29 September 2006 and subsequent FINMA circulars. Switzerland imposes a more differentiated and tighter regime than the internationally agreed rules, including more stringent risk weights.

Refer to the "Capital management" section of this report for more details about capital requirements

Capital requirements for the two large banks, UBS and Credit Suisse, exceed the Swiss minimum due to a mandatory capital buffer under Pillar 2 of Basel II. The revised decree on capital requirements issued at the end of 2008 increased the risk-based buffer and complemented it with a leverage ratio requirement, i.e. a minimum ratio of capital and balance sheet.

The Federal Act of 10 October 1997 on the Prevention of Money Laundering in the Financial Sector (Anti-Money Laundering Act, AMLA) lays down a common standard for due diligence obligations for the whole financial sector which must be met in order to prevent money laundering.

In its capacity as a securities broker, UBS is governed by the Swiss Federal Law on Stock Exchanges and Securities Trading of 24 March 1995, as amended. FINMA is the competent supervisory authority.

Regulation by FINMA

FINMA is strongly involved in the shaping of the legislative framework for banks, especially through the following mechanisms:

­- First, FINMA has substantial influence on the drafting of Swiss federal legislation (for example, the specific ordinance concerning the prevention of money laundering of 18 December 2002, as amended).

-­ On a more technical level, FINMA is empowered to issue circulars, 44 of which are presently effective. These include, for example, FINMA circular 08 / 38 on market behavior and FINMA circular 08 / 24 on supervision and internal controls at banks.

Self-regulation by the SIX Swiss Exchange and the Swiss Bankers Association

Certain aspects of securities brokering, such as the organi­zation of trading, are subject to self-regulation through the SIX Swiss Exchange (SIX), under the overall supervision of FINMA. Examples are:

­- the Listing Regulations of 24 January 1996, as amended, and the General Conditions dated 7 September 2007 (the Listing Regulations are currently under review and amendments may go into force on 1 July 2009); and

-­ the Directive on the Disclosure of Management Trans­actions of 1 July 2005.

FINMA also officially endorses self-regulatory guidelines issued by the banking industry (through the Swiss Bankers Association), making them an integral part of banking regulation. Examples are:

-­ Agreement on the Swiss banks' code of conduct with regard to the exercise of due diligence, 2008.

-­ Directives on the independence of financial research, 2008.

-­ Guidelines on the simplified prospectus for structured products, 2007.

­- Agreement of Swiss Banks on Deposit Insurance, 2005.

-­ Guidelines on the handling of dormant accounts, custody accounts and safe-deposit boxes held in Swiss banks, 2000.

Two-tier system of supervision and direct supervision of UBS and Credit Suisse

Generally, supervision in Switzerland is based on a division of tasks between FINMA and a number of authorized audit firms. Under this two-tier supervisory system, FINMA has the responsibility for overall supervision and enforcement measures while the authorized audit firms carry out official duties on behalf of and subject to sanctions imposed by FINMA. The responsibility of external auditors encompasses the audit of financial statements, the reviewing of banks' compliance with all prudential requirements and on-site audits.

Due to their major role in the Swiss financial system, ­FINMA subjects UBS and Credit Suisse to its direct supervision. The regime of direct supervision is regulated by the FINMA 08 / 9 circular on the supervision of large banking groups. Supervisory tools include an intensive schedule of meetings with bank management and provision of management information encompassing all control and business ­areas, direct audits (on-site examinations), on-site visits to the banks' operations in foreign jurisdictions and coordinated action and exchange with important host supervisors.

FINMA assigns to each of the two large banking groups a team responsible for monitoring their risk situation on an ongoing basis. The analyses produced by these supervisory teams are combined and supplemented with those of two cross-institutional specialist groups focusing on specific aspects of investment banking, wealth management and asset management.

Disclosures to the Swiss National Bank

While Switzerland's banks are primarily supervised by ­FINMA, compliance with liquidity rules is monitored by the Swiss ­National Bank (SNB). The SNB also takes a direct interest in the stress testing practice of both big banks. Liquidity regulation is currently being reformed.

Regulation and supervision in the US

Banking regulation

UBS's operations in the US are subject to a variety of regulatory regimes. It maintains branches in California, Connecticut, Illinois, New York and Florida. UBS's branches located in California, New York and Florida are federally licensed by the Office of the Comptroller of the Currency. US branches located in Connecticut and Illinois are licensed by the state banking authority of the state in which the branch is located. Each US branch is subject to regulation and examination by its licensing authority. UBS also maintains state and federally chartered trust companies and other limited purpose banks, which are regulated by state regulators or the Office of the Comptroller of the Currency. In addition, the Board of Governors of the Federal Reserve System exercises examination and regulatory authority over UBS's state-licensed US branches. Only the deposits of UBS's subsidiary bank located in the state of Utah are insured by the Federal Deposit Insurance Corporation. The regulation of the firm's US branches and subsidiaries imposes restrictions on the activities of those branches and subsidiaries, as well as prudential restrictions, such as limits on extensions of credit to a single borrower, including UBS subsidiaries and affiliates.

The licensing authority of each US branch has the authority, in certain circumstances, to take possession of the business and property of UBS located in the state of the office it licenses. Such circumstances generally include violations of law, unsafe business practices and insolvency. As long as UBS maintains one or more federal branches, the Office of the Comptroller of the Currency also has the authority to take possession of the US operations of UBS AG under similar circumstances, and this federal power may pre-empt the state insolvency regimes that would otherwise be applicable to UBS's state-licensed branches. As a result, if the Office of the Comptroller of the Currency exercised its authority over the US branches of UBS AG pursuant to federal law in the event of a UBS insolvency, all of UBS's US assets would most likely be applied first to satisfy creditors of its US branches as a group, and then made available for application pursuant to any Swiss insolvency proceeding.

In addition to the direct regulation of its US banking offices, UBS is subjected to oversight regulation by the Board of Governors of the Federal Reserve System under various laws (including the International Banking Act of 1978 and the Bank Holding Company Act of 1956) because it operates US branches. On 10 April 2000, UBS AG was designated a "financial holding company" under the Bank Holding Company Act of 1956. Financial holding companies may engage in a broader spectrum of activities than bank holding companies or foreign banking organizations that are not financial holding companies, including underwriting and dealing in securities. To maintain its financial holding company status, (1) UBS, its US subsidiary federally chartered trust company and its US subsidiary bank located in Utah are required to meet certain capital ratios, (2) UBS's US branches, its US subsidiary federally chartered trust company, and its US subsidiary bank located in Utah are required to meet certain examination ratings, and (3) UBS's subsidiary bank in Utah is required to maintain a rating of at least "satisfactory" unter the Community Reinvestment Act of 1997. A major focus of US governmental policy relating to financial institutions in recent years has been aimed at fighting money laundering and terrorist financing. Regulations applicable to UBS and its subsidiaries impose obligations to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing could have serious consequences for the firm, both in legal terms and in terms of its reputation.

US regulation of other US operations

In the US, UBS Securities LLC and UBS Financial Services Inc., as well as UBS's other US-registered broker-dealer entities, are subject to regulations that cover all aspects of the securities business, including: sales methods; trade practices among broker-dealers; use and safekeeping of customers' funds and securities; capital structure; record-keeping; the financing of customers' purchases; and the conduct of directors, officers and employees.

These entities are regulated by a number of different government agencies and self-regulatory organizations, including the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). Depending upon the specific nature of a broker-dealer's business, it may also be regulated by some or all of the New York Stock Exchange (NYSE), the Municipal Securities Rulemaking Board, the US Department of the Treasury, the Commodities Futures Trading Commission and other exchanges of which it may be a member. In addition, the US states, provinces and territories have local securities commissions that regulate and monitor activities in the interest of investor protection. These regulators have a variety of sanctions available, including the authority to conduct administrative proceedings that can result in censure, fines, the issuance of cease-and-desist orders or the suspension or expulsion of the broker-dealer or its directors, officers or employees.

Created in July 2007 through the consolidation of the National Association of Securities Dealers (NASD) and the member regulation, enforcement and arbitration functions of the NYSE, FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services.

FINRA covers a broad spectrum of securities businesses, including: registering and educating industry participants; examining securities firms; writing rules; enforcing those rules and the federal securities laws; informing and educating the investing public; providing trade reporting and other industry utilities; and administering a dispute resolution forum for investors and registered firms. It also performs market regulation under contract for the NASDAQ Stock Market, the American Stock Exchange and the Chicago Climate Exchange.

Regulation and supervision in the UK

UBS's operations in the UK are regulated by the Financial Services Authority (FSA), which establishes a regime of rules and guidance governing all relevant aspects of financial services businesses.

The FSA has established a risk-based approach to supervision and has a wide variety of supervisory tools available to it, including regular risk assessments, on-site inspections (which may relate to an industry-wide theme or be firm-specific) and the ability to commission reports by skilled persons (who may be the firm's auditors, IT specialists, lawyers or other consultants as appropriate). The FSA also has an extremely wide set of sanctions which it may impose under the Financial Services and Markets Act 2000, broadly similar to those available to US regulators.

Some of UBS's subsidiaries and affiliates are also regulated by the London Stock Exchange and other UK securities and commodities exchanges of which UBS is a member. The business is also subject to the requirements of the UK Panel on Takeovers and Mergers where relevant.

Financial services regulation in the UK is conducted in accordance with European Union directives which require, among other things, compliance with certain capital adequacy standards, customer protection requirements and conduct of business rules (such as MiFID). These directives apply throughout the European Union and are reflected in the regulatory regimes of the various member states. The standards, rules and requirements established under these directives are broadly comparable in scope and purpose to the regulatory capital and customer protection requirements imposed under applicable US law.

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