With rates rising, some closed-end funds (particularly the highly leveraged ones) are starting to show some significant losses.  The White Law Group is investigating the liability that brokerage firms may have for unsuitably recommending certain closed-end funds.

Fixed-income investors are often attracted to closed-end funds because many of the funds are designed to provide a steady stream of income, usually on a monthly or quarterly basis as opposed to the biannual payments provided by individual bonds.

Unlike mutual funds, closed-end mutual funds issue all of their shares on the first day they go public (instead of issuing and redeeming new shares everyday at their NAV). After that, the fund’s market value can move just like an individual stock, free to rise and fall above and below the actual cash value of the shares.  And while these shares can trade at a premium to their actual cash value or NAV, they usually trade at a discount (ranging from 2-3% on the low end, to 15-25% on the high end).

Closed-end funds will commonly employ leverage to enhance their yields. With this extra leverage comes additional risk.  It is this risk that makes closed-end funds unsuitable for conservative investors.

There are certain other features of closed-end funds that are distinct and make the investments potentially unsuitable for conservative and/or retired investors, including that:

–          Once a closed-end fund’s IPO is complete, fund shares are bought and sold primarily in the secondary market;

–          Closed-end funds pay a high sales load, often as high as 4.75%, on the initial offering;

–          The market price of a closed-end fund’s shares may trade at, below or above NAV (Net Asset Value).

–          Your Financial Advisor may also earn additional compensation in connection with secondary market transactions you make, sometimes as high as 3.5% of your purchase (a “mark up”), and up to 1.5% on a sale (a “mark down”).

Some funds to monitor as rates rise are the following:

UBS Puerto Rico Fixed Income Fund I, Inc.

UBS Puerto Rico Fixed Income Fund II, Inc.

UBS Puerto Rico Fixed Income Fund III, Inc.

UBS Puerto Rico Fixed Income Fund IV, Inc.

UBS Puerto Rico Fixed Income Fund V, Inc.

UBS Puerto Rico Fixed Income Fund VI, Inc.

UBS Puerto Rico Investors Tax-Free Fund, Inc.

UBS Puerto Rico Investors Tax-Free Fund II, Inc.

UBS Puerto Rico Investors Tax-Free Fund III, Inc.

UBS Puerto Rico Investors Tax-Free Fund IV, Inc.

UBS Puerto Rico Investors Tax-Free Fund V, Inc.

UBS Puerto Rico Investors Tax-Free Fund VI, Inc.

UBS Puerto Rico AAA Portfolio Bond Fund, Inc.

UBS Puerto Rico AAA Portfolio Bond Fund II, Inc.

UBS Puerto Rico AAA Portfolio Target Maturity Fund, Inc.

UBS Puerto Rico Tax-Free Target Maturity Fund I, Inc.

UBS Puerto Rico Tax-Free Target Maturity Fund II, Inc.

UBS Tax Free Puerto Rico Fund, Inc.

UBS Tax Free Puerto Rico Fund II, Inc.

UBS Tax Free Puerto Rico Target Maturity Fund, Inc.

UBS Puerto Rico Mortgage-Backed & Government Securities Fund, Inc.

UBS Puerto Rico GNMA & US Government, Inc.

Some of these funds are already trading at a steep discount to their NAV.  Others may be highly leveraged, exposing them to interest rate risk.

Brokerage firms and financial advisers have an obligation to insure that an investment is appropriate in light of the investor’s age, net worth, income, investment experience, and investment objectives. If a broker or brokerage firm makes an unsuitable recommendation, investors may have an actionable claim to recover their investment losses through a FINRA arbitration.

If you suffered losses in a closed-end fund and would like to speak to a securities attorney about whether you have a potential FINRA dispute resolution claim, please call The White Law Group’s Chicago office at 312/238-9650 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 http://whitesecuritieslaw.com.