According to a recent Wall Street Journal report, several of the nation’s largest brokerage firms have warned their financial advisors to steer clear of about $70 billion of Puerto Rican debt on the market. Some of Puerto Rico’s bonds are slipping into “junk” territory, as Puerto Rico’s economy has remained weak.
The warnings are the latest blow to the $3 trillion plus municipal-bond market. Puerto Rico’s debt has been popular with U.S. investors for its high yields and special tax benefits (residents of Puerto Rico typically pay no federal income tax). The plunge in Puerto Rico’s bond values has tracked Puerto Rico’s worsening economic troubles.
According to Morningstar, some 77% of U.S. municipal-bond mutual funds hold bonds sold by Puerto Rico. This raises the very real concern that investors who do not even realize that they are exposed to the Puerto Rico municipal bond crisis may be impacted.
While most of the big banks do business in Puerto Rico, UBS is one of the few to have a large team of bankers and financial advisors on the island. Reports indicate that UBS has at least 130 financial advisors in Puerto Rico who manage money for the island’s elite.
UBS is also one of the larger investors in Puerto Rico’s municipal bond debt, having created a family of closed-end funds called the family of Puerto Rico Funds. According to marketing materials, UBS had sold more than $10 billion of the funds through the end of 2012.
Due to the decline in value of Puerto Rico’s municipal bond debt, the value of UBS’s Puerto Rico Funds is plummeting, leaving the Puerto Rican arm of the firm and its 132 financial advisors there embroiled in a potentially lengthy fight with local investors who purchased the highly leveraged funds and now want their money back.
It was only last year that UBS’s Puerto Rico subsidiary settled Securities and Exchange Commission claims that it defrauded Puerto Rican mutual-fund customers by concealing a liquidity crisis, artificially propping up market prices and masking its controls of the secondary market for proprietary closed-end funds that it managed on the island.
The problems with Puerto Rico municipal bonds may not end with UBS though. Various reports indicated that William Galvin, the Massachusetts Secretary of the Commonwealth, said he is investigating three large fund managers, Fidelity Investments, OppenheimerFunds, a unit of MassMutual Life Insurance Co. and UBS Financial Services, to determine how they sold mutual funds with heavy concentrations of Puerto Rico debt and how they disclosed the risk. Regulators will no doubt continue to monitor whether these firms or others over-concentrated their funds in Puerto Rico’s debt without fully disclosing the risks.
Individual investors in Puerto Rico municipal bonds or funds that invested in Puerto Rican debt, like the UBS Puerto Rico Investors Tax-Free Fund, UBS Puerto Rico AAA Portfolio Bond Fund, UBS Puerto Rico Tax-Free Target Maturity Fund, and UBS Puerto Rico Fixed Income Fund, are also looking at their options.
Brokerage firms and financial advisers are required to disclose the risks of any investments and to insure that each investment recommended is appropriate in light of the investor’s age, net worth, income, investment experience, and investment objectives. If a broker or brokerage firm fails in these responsibilities the investor may have a claim to recover their investment losses through a FINRA arbitration claim.
The White Law Group continues to investigate the liability that brokerage firms may have for recommending Puerto Rican municipal debt or funds that invested in Puerto Rican debt.
For a free consultation with a securities attorney, please call The White Law Group’s Boca Raton, Florida office at 561-807-6804 for a free consultation.
The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida.
For more information on The White Law Group, please visit our website at https://whitesecuritieslaw.com.
For more information on this ongoing crisis, visit these links:
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