UBS and Puerto Rico’s OCIF Settle Funds for Closed-End Bond Fund Probe

It was announced last Monday that UBS will be paying $1.7 million in restitution to 34 clients who invested money in a closed-end bond fund in Puerto Rico. UBS will also pay $3.5 million in “contribution” money ordered by Puerto Rico’s Office of the Commissioner of Financial Institutions (OFIC) intended for their Securities Trading, Investor Education and Investigation Fund. As part of the settlement, UBS agreed to pay out the money within 45 days of the execution of the agreement.

OCIF investigated a sample of clients who invested money in the closed-end bond funds from January of 2006 through September 2013. These clients tended to be elderly, with low-risk portfolio tolerances and with a good chunk of their net assets invested for them in the mostly illiquid funds. The OCIF found that UBS and its brokers may have recommended to the clients the use of “non-purpose” loans to buy more bond funds. The purchasing of more funds with non-purpose loans is unsuitable as are the recommendations to do so, themselves. A non-purpose loan is a type of loan that uses an investment portfolio as loan collateral and the proceeds of which can not be used to purchase, carry or trade securities. The OCIF also observed that UBS failed to adequately supervise their brokers, and that the record keeping on many of the accounts was not done diligently or accurately.

An additional component of the agreement states that UBS will conduct a thorough review of the accounts in question to determine whether to pay supplementary restitution. UBS will also be made to review and redefine its policies and procedures to comply better with regulatory rules, focusing on the use of non-purpose loans in particular.

Last year, the value of the Puerto Rico government funds fell by $3.7 billion. This drastic downturn caused many investors to file lawsuits and FINRA arbitration claims. The clients claim they were pressured into the risky, unsuitable investments, and that too much of their money was concentrated in too similar funds. If you invested in Puerto Rican bond funds, please call our Chicago based securities law office at 312-332-4200 to speak with an attorney about possibly recovering your losses.

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