Securities regulators in Massachusetts have begun to make inquiries about the sale of Puerto Rican municipal debt obligations to investors in the state. Letters from the office of William Galvin, Secretary of the Commonwealth, were sent to Fidelity's FMR Co. Inc., OppenheimerFunds (a unit of Massachusetts Mutual Life Insurance Co.), and UBS Financial Services Inc. The Massachusetts Securities Division is looking to determine the extent of Massachusetts investors' exposures to the risks of Puerto Rican bonds. It also is looking into whether investors were adequately made aware of the risks associated with their investments and whether the bonds were properly priced. Because of the advantageous yields and tax benefits, many Massachusetts state-specific municipal bond funds have a high concentration of Puerto Rican debt.
Over the past decade, UBS has sold $10 billion in proprietary Puerto Rico municipal bond funds, which are heavily weighted in Puerto Rican securities and are also highly leveraged. According to industry observers, the value of Puerto Rican municipal bonds declined in September for two reasons: 1) Puerto Rico has been facing its own fiscal crisis, with economic stagnation and enormous pension obligations; and 2) many investors bought the individual municipal bonds or bond funds using margin accounts. As the values of the bonds decreased, brokerage firms made margin calls, which forced investors to sell more bonds or municipal bond funds.
UBS is Puerto Rico's market leader in closed-end funds, operating more than a dozen bond funds such as:
Tax-Free Puerto Rico Fund, Inc.
Tax-Free Puerto Rico Fund II, Inc.
Tax-Free Puerto Rico Target Maturity Fund, Inc.
Puerto Rico AAA Portfolio Target Maturity Fund, Inc.
Puerto Rico AAA Portfolio Bond Fund, Inc.
Puerto Rico AAA Portfolio Bond Fund II, Inc.
Puerto Rico GNMA & US Govmt. Target Maturity Fund, Inc.
P.R. Mortgage-Backed & US Govmt. Securities Fund, Inc.
Puerto Rico Fixed Income Fund, Inc.
Puerto Rico Fixed Income Fund II, Inc.
Puerto Rico Fixed Income Fund III, Inc.
Puerto Rico Fixed Income Fund IV, Inc.
Puerto Rico Fixed Income Fund V, Inc.
Puerto Rico Fixed Income Fund VI, Inc.
The funds UBS manages are themselves highly leveraged. For example, the Tax Free Puerto Rico Fund II has a leverage ratio of 53 percent, meaning for every dollar of customer assets it holds, it has roughly another dollar of assets bought with borrowed money. UBS's other Puerto Rico funds are similarly leveraged and have declined between 50 and 60 percent in value. Some investors have borrowed monies to purchase the funds and further increased the risk of their investment.
Investors may be able to recover their investment losses by filing Financial Industry Regulatory Authority (FINRA) arbitration claims against Fidelity Investments, OppenheimerFunds (Massachusetts Mutual Life Insurance Co.), and UBS Financial Services Inc.
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. Please see our Instablog profile (left column) for ways to contact us and get answers to any of your questions about this blog post and/or any related matter.