UBS Settles Claims with Puerto Rico Regulator

Puerto Rico’s Office of the Commissioner of Financial Institutions recently announced a settlement with UBS regarding the offering and sale of Puerto Rico closed-end mutual funds. Under the settlement, UBS will offer $1.7 million restitution to 34 clients, mostly senior, low net worth investors with conservative investment profiles whose investments in Puerto Rico closed-end funds represented a substantial portion of their liquid net assets. UBS also will pay a $3.5 million contribution for the Securities Trading, Investor Education, and Investigation Fund. UBS made no admission of liability or wrongdoing.

UBS Puerto Rico was the primary underwriter of 23 CEFs with a total market capitalization of more than $5 billion. The UBS Family of Funds, included: 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 & U.S. Government Target Maturity Fund, Inc.; Puerto Rico Mortgage-Backed & U.S. Government 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.; and Puerto Rico Fixed Income Fund VI, Inc.

“This agreement is fair to all concerned. On one hand we avoid a costly and protracted administrative/judicial process and affected clients identified in the examination receive immediate restitution for their losses,” said OCIF Commissioner Rafael Blanco. “On the other hand OCIF meets its ministerial obligation by ensuring that UBS adopts measures that will avoid recurrence of cited findings.”

The settlement stemmed from the OCIF’s investigation of the operations of UBS Financial Services Incorporated of Puerto Rico (UBS) covering the period between January 1, 2006 through September 30, 2013. OCIF’s investigation examined compliance with Law 60 (Puerto Rico Uniform Securities Act) and its Regulation 6078 as well as other applicable laws under the jurisdiction of OCIF regarding the offer, sale, and/or purchase of Puerto Rico closed-end funds under the administration of UBS.

OCIF announced that after analysis of the data it collected, interviews of a representative sample of clients with a conservative risk tolerance profile and with a significant level of their liquid net assets invested in the funds demonstrated that UBS may have permitted or recommended such clients the use of “non-purpose” loans for the purchase of additional closed-end funds, an ineligible activity for “non-purpose” loans. OCFI also found apparent irregularities in the management of some of these client’s accounts and lack of adequate record keeping and diligent supervision by UBS of its agents.

In addition to the contribution and restitution, the settlement calls for enhanced supervision of six UBS agents for a period of six months, automatically extendable for an additional six months, unless otherwise approved by the OCIF. Further, within six months from the execution of the agreement, UBS must conduct a good faith, confidential review of customer accounts where senior, low net worth investors with a conservative risk profile had a potentially significant level of their liquid net assets invested in Puerto Rico closed-end funds to determine whether additional action and restitution, if any, is required. UBS also will review and update its policies and procedures to ensure compliance with applicable regulatory rules, in particular, with respect to the use of “non-purpose” loans.

Notwithstanding the settlement, UBS faces hundreds of arbitration claims and lawsuits from investors in the closed-end funds. Dozens of investors have retained Sonn Law Group and Aldarondo & Lopéz Bras to pursue claims against UBS for the sale of Puerto Rico funds and bonds. Aldarondo & Lopéz Bras is a separate law firm only licensed to practice law in Puerto Rico. Many investors suffered tremendous losses after investing heavily in Puerto Rico bonds and closed-end mutual funds that invest heavily in Puerto Rico government bonds. The closed-end mutual funds employed leverage, or borrowed funding, which magnified investor risk and loss. UBS also allegedly recommended leveraged investment strategies, such as repo transactions, margin, and non-purpose loans, which further exacerbated investor losses. Local investments in Puerto Rico bonds and securities fell by about $3.7 billion last year, according to the Financial Institutions Commissioner’s Office, as reported by Caribbean Business.

While UBS dominates the island’s market through its UBS Family of Funds, some of which are co-managed with Popular Securities, Banco Santander (Santander Securities), Merrill Lynch, Raymond James, Oriental Bank and others also sold investments linked to Puerto Rico’s municipal debt. Claims for investment losses against UBS and other brokerage firms must be arbitrated through the Financial Industry Regulatory Authority (“FINRA”), the largest dispute resolution forum in the securities industry.

If you invested in UBS CEFS, were a client of UBS, or obtained a loan from UBS Bank, and have experienced financial losses, please call us at 844-689-5754 or complete our “contact form.” Sonn Law Group is a nationally recognized law firm representing individuals, trusts, corporations and institutions in claims against brokerage firms, banks and insurance companies.