UBS Puerto Rico: Unsuitable Concentration Claims To Recover Investment Losses

One of the primary legal claims our law firm is making for UBS clients who lost sums in the closed end UBS funds are suitability claims related to the concentration of the holdings. Under FINRA Conduct Rules, brokers at UBS are required to make suitable, approrpriate recommendations consistent with the clients financial resources, net worth, actual investment objectives, age and other related factors. Many of our clients who are suing UBS through the FINRA arbitration process were recommended very large concentrations of UBS closed end Puerto Rico related bond funds. Based on clients individual needs and circumstances, these recommendations may have been unsuitable given the leverage of the funds as well as the concentrated bets in the funds.

The UBS-PR bond funds are municipal bond funds that are mandated to invest at least 67% of their assets in municipal debt issued by Puerto Rico. These funds are closed-end funds, but unlike most domestic closed-end funds, are not registered under the Investment Company Act of 1940. Significantly, this allows the UBS-PR Bond Funds to borrow one dollar for every dollar invested whereas registered closed-end funds are limited to borrowing 33 cents for every dollar invested. Thus, the UBS-PR Bond Funds were able to use three times the leverage of a registered closed end mutual fund. The funds’ stated investment objectives were to provide current income consistent with preservation of capital. The Funds do not trade on any national stock exchange and are substantially less liquid than similarly situated exchange-traded funds.

The Funds are underwritten, marketed, and sold exclusively by UBS-PR. UBS-PR generates nearly half of its total revenue from the UBS-PR Bond Funds, and these Funds represent the largest, single course of revenue for the company. Interestingly, about 90% of UBS-PR customers invest in fixed-income securities, primarily municipal bonds and bond-related closed end funds. These funds can either be purchased at the IPO or on the secondary market. If fund shares are purchased at the IPO, then a prospectus is allegedly sent to the investor. In the event an investor purchases shares on the secondary market, the investor would not receive a fund prospectus.

For clients who received a large concentration of their portfolio in the UBS funds, those recommendations may have been unsuitable for the client. The suitability of the transaction is usually examined through the individual clients and his or her needs, financial resources, age and actual investment objective. In our FINRA statement of claims filed against UBS, we’ve alleged the transactions in the UBS bond funds are unsuitable and we are seeking damages under the Puerto Rico Securities Act. To receive a free evaluation of the merits of a potential claim against UBS and to learn about how the firm can be sued for investment related losses in these funds, please call our securities fraud legal team at 312.332.4200



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