Failures on sales led to UBS customers being exposed to an unacceptable risk of unsuitable sale of the fund, says the FSA.
UBS also failed to deal with complaints from customers about sales of the fund.
Between December 2003 and September 2008, UBS sold the fund to almost 2,000 high net worth customers with initial investments totaling £3.5bn.
Problems occurred when AIG's share price fell sharply in 2008, causing a large of number of investors to withdraw their investments which created a run on the fund.
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Tracey McDermott, director of enforcement and financial crime, said: "UBS's conduct fell far short of what its customers deserved and what the FSA requires. It failed to ensure it understood the product it was selling, failed to recommend it to the right customers and failed to take effective action in the financial crisis when the problems with the fund came to the fore."
UBS agreed to settle at an early stage entitling it to a 30 per cent discount, without the discount the fine would have been £13.5m.
The fund is the same fund as Coutts and Company were fined £6.3m in 2011 for selling during the same period as UBS.
This is the third fine UBS has received in several months following a fine of £940m for Libor manipulation and £29.7m for failures relating to rogue trader Kweku Adoboli.

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