The predominantly older investors sued UBS in May, claiming a former broker in Puerto Rico directed clients to borrow money to buy mutual funds whose value plunged because of the commonwealth's fiscal woes.

U.S. authorities are also probing UBS for criminal fraud over the matter, lawyers representing some of the investors said in June. At issue is whether UBS executives knew proceeds from loans made by a Utah unit of the Swiss bank were used in a way that violated its own lending rules.

"Declines in the market prices of Puerto Rico municipal bonds and of UBS Puerto Rico sole-managed and co-managed closed-end funds since August 2013 have led to multiple regulatory inquiries, as well as customer complaints and arbitrations with aggregate claimed damages exceeding USD $600 million," the quarterly report said.

The complaint filed in Manhattan federal court said UBS exacerbated the problem by using leverage in the funds. It said the bank encouraged clients to take out $500 million of costly loans to invest in the funds, when they were at an age when they should have opted to preserve capital ahead of retirement.

The quarterly report said an internal review showed some clients, acting on the recommendation of one financial advisor, invested proceeds of loans in closed-end funds which was in contravention of their loan agreements.

Puerto Rico's economy has been in or near recession for eight years, and its debt was cut to junk status this year by the three major U.S. credit rating agencies. The commonwealth is expected to start restructuring some of its debt this year with concurrent losses for bond holders.

Separately, UBS said its U.S. brokerage business has $24 million of loans to investors that it considers "impaired" because they are collateralized by Puerto Rican municipal bonds and related funds.

The U.S. brokerage unit, which has been encouraging its 7,000 financial advisers to sell mortgages and other loans backed by securities portfolios to wealthy clients, ended the second quarter with $660 million of loans collateralized by Puerto Rico securities and closed-end funds. That is down from $814 million three months earlier, primarily because of share buybacks by some of the closed-end funds.

(Reporting by Edward Krudy; additional reporting by Jed Horowitz; Editing by David Gregorio)